User Tag List

Page 3 of 3 FirstFirst 123
Results 21 to 24 of 24

Thread: The Financial Crisis in a Nutshell

  1. #21
    Permabanned Array
    Join Date
    Mar 2008


    I'd like to share a segment of Glenn Beck's talk radio program where he discusses the recent comments by Rahm Emanuel (Obama's new Chief of Staff) about the financial crisis, where he says "You never want a serious crisis to go to waste. And what I mean by that is an opportunity to do things you think you could not do before."

    Glenn Beck - The Glenn Beck Program - Nov 21 2008 - Hour 1 - Free MP3 Stream on IMEEM Music

  2. #22
    Senior Member Array reason's Avatar
    Join Date
    Apr 2007


    Something more that I wrote about the current economic problems. Still trying to understand what is going on and increasingly hoping that I don't.

    A recession is defined as a period of two or more consecutive quarterly declines in gross domestic product, while a depression is defined as a prolonged period of recession usually lasting two or more years.

    However, GDP can be increased to the detriment of long term economic prosperity, or in other words, recessions can sometimes be a good thing.

    One way to increase GDP in the short term is to borrow. Suppose that we wish to measure your contribution to GDP. The major component of your contribution will be consumption, that is, the final price of all goods and services you purchase in your country of residence (distinguished from imports). If, therefore, your consumption can be increased without decreasing other spending then GDP will increase. But how can you spend more on consumption without spending less somewhere else? It's easy, take out a loan!

    Loans redistribute money across time. For example, suppose that your income this year will be $10,000, and further, your expected income over the next five years $250,000, or $50,000 per annum on average. Noting that your future self will have a far greater income than your present self, you decide that some income redistribution would be appropriate and decide to borrow $30,000. Your income this year jumps to $40,000, while your expected income only decreases to $220,000, or $44,000 per annum on average (we'll ignore interest rates to keep it simple). By redistributing your income across time you can gain access to it when it is needed most.

    In the short term this loan can substantially increase your contribution to GDP by increasing consumption. It is, however, offset by lower contributions to GDP in successive years as the loan is paid off. Nonetheless, your contribution to GDP would have a positive, or at least neutral, trend. But suppose that you grossly overestimate your expected income. Instead of $250,000, you will actually have $150,000.

    The $30,000 loan is sold on these false expectations, meanwhile, you begin to adjust your consumption to your new $40,000 income and $250,000 expected income. Your contribution to GDP soars---not only do you have more money now but expect to have even more in the future, and you spend accordingly.

    Eventually, however, the 'next five years' begins and you discover that your expected income was overestimated. Instead of $50,000 per annum on average you have only $30,000, and you still have to pay back your loan! After the first year, your income actually declines from $40,000 to $24,000 and your contribution to GDP decreases. Unwilling to give up your $40,000 income lifestyle you decide to borrow $16,000. Another redistribution of wealth from an increasingly poor future to the present. You have, in effect, delayed a personal recession by borrowing. However, when the future once more becomes the present, you have an even lower income and even greater debts.

    It is a cycle that cannot go on forever. Even if you wish it to, eventually lenders are going to wise up, look upon your impoverished future, and decline to loan you any more money. In fact, by not accepting the recession the first time the eventual depression is magnified. The bad decisions of the past needed to be paid for before progress could once again be made, and denial of this only deepened the eventual misery. Your contribution to GDP may go down to correct errors of the past, and trying to prop it up by borrowing and spending on consumption can at best delay, and at worst deepen, your eventual crash.

    The recent credit bubble, fuelled by decades of espansionary monetary policy by the fed (so-called 'easy money' policy which make loans more attractive) and the delusion that property prices could only go up, greatly inflated Americans' current income and expected income (e.g. home equity). Some proportion of the rise in GDP preceding these economic troubles was misleading, and a recession is desperately needed to pay for the mistakes it led people into.

    The government, however, is currently trying to prop up GDP by borrowing even more money from an increasingly impoverished future. Expansionary fiscal and monetary policy are both veiled forms of borrowing. They are trying to prop up GDP (or aggregate demand) and delay the inevitable, but this will only make the eventual crash worse. Moreover, once the lenders get wise to this pyramid scheme (because that's what it's like), they'll stop giving the US, including its government, any loans. At that point they'll have to just print the money to fund their activities, and thereby, create massive inflation (they'll call all of this 'economic stimulus', of course).

    Now lets hope that I am utterly wrong, or at the least, the impact of all this will not be so great.
    A criticism that can be brought against everything ought not to be brought against anything.

  3. #23
    Senior Member Array reason's Avatar
    Join Date
    Apr 2007


    A quick not about "economic stimuli".

    The U.S.'s GDP is equal to C+I+G+(X-M).

    C stands for consumption and is equal to the final price of all non-investment goods and services purchased in the U.S., such as automobiles, televisions, bread, pencils, toothpaste, lawyers, barbers, doctors, and so on. I stands for investment and is equal to the final price of all investment goods purchased in the U.S., such as machinary, equipment, and tools for business enterprises (not stocks and bonds). I also includes all construction expenditures and, either positive or negative, inventory changes. G stands for government and is equal to the final price of all goods and services purchased by Federal, state and local governments. G does not include transfer payments such as social security. X stands for exports and is equal to the final price of all goods and services produced in the U.S. but bought by people outside the U.S. And finally, M stands for imports and is equal to the final price of all goods and services produced outside of the U.S. but bought by people inside the U.S.

    Growth is defined a change in GDP and can be either positive or negative, and a recession is defined as two or more consecutive quarters of negative growth (i.e. changes in GDP).

    According to some, during a recession the government should decrease taxes and increase spending to stimulate growth.

    When taxes are decreased people have more money to spend on consumption and investments, and thereby, increase the C and I components of GDP, and the G component can be increased by more spending.

    To spend more while taxing less the government should, according to those who hold the above view, run a budget deficit during a recession, that is, borrow money to stimulate the economy. Then, during periods of strong economic growth the government should increase taxes and decrease spending* (to pay off the debt accumulated whilst previously stimulating the economy).

    But money the government borrows and spends today to "stimulate" the economy is transferred from the future.

    First, it should not be taken for granted that money taken from future taxpayers and spent by the government today will be spent effectively as it might if future taxpayers were allowed to spend it themselves (the recent auto and financial industry bailouts are a case in point). Second, if government borrowing overestimates future prosperity (i.e. tax revenue) then, just as in the illustration in my previous post, such a "stimulus" may further impoverish an already bleak future.

    The problem in the U.S. is that too many people have already borrowed way too much. House prices have been massively overpriced. Both of these things have temporarily boosted GDP and, for whatever it may be worth, "growth". A stimulus package, at this point, is only going to deepen the debt which is responsible for the desperately needed recession.

    It should be clear from the above that changes in GDP, or "growth", do not necessarily indicate anything about the overall long-term prosperity of an economy (which is why I have taken to putting such words in scare-quotes). Politicians are doing all they can to fiddle the numbers and make things look good, and as long as people consider it the job of politicians to ensure positive GDP changes, then politicians will use whatever tricks they can to create "growth", even if it is detrimental to long-term prosperity. Economic stimuli are one of these tricks. Don't fall for it, especially now.

    * Unfortunately, politicians are keener to decrease taxes and increase spending than increase taxes and decrease spending. Instead of borrowing during a recession and then paying off debt during periods of economic growth, government tends to simply borrow less during periods of economic growth. Therefore, debt has increased steadily.
    A criticism that can be brought against everything ought not to be brought against anything.

  4. #24
    Senior Member Array reason's Avatar
    Join Date
    Apr 2007


    Oh sh*t.

    This recession has already been rolled over. In other words, the problem described in the last couple of posts has already happened (at least) once!

    The tech bubble burst in the late nineties and what happened? Almost nothing--no recession (three quaters of negative "growth" punctuated by positive).

    Well, that's not quite right. The fed reduced the interest rate to around 1 percent from 6!

    Low interest rates recudes the incentive to save money--if borrowing money is like redsitributing money from the future to the present then saving is like redistributing money from the present to the future, and low interest rates make that less rewarding. So people started spending their savings. Low interest rates also increase the incentive to borrow--interest rates are the price of borrowing and at lower prices more of anything is bought.

    Both of these things induced more spending by the public (the biggest component of GDP is consumption) and helped set the stage for the housing bubble.

    Politicians are playing a game to increase GDP, because positive GDP means "growth" in the perverse world of macroeconomics textbooks. It can also make people feel wealthy (hey, they get to consume lots!). But all it did was push back the recession.

    Now we have to recessions to deal with, the dot-com bubble and the housing bubble, the latter caused by the policies intended to "fix" the former! The United States is going to take two recessions at once so that George W. Bush could get reelected--what a great deal! Can Obama do the same? I hope not. Unfortunately, he'll likely end up taking the blame for a recession/depression which has been years in the making ... I would feel sorry for the guy if the policies he wants to implement weren't going to make things even worse.

    "no matter how cynical you get, you can't keep up"
    A criticism that can be brought against everything ought not to be brought against anything.

Similar Threads

  1. [E7] 7w8 in a nutshell
    By themarlins in forum Enneatypes
    Replies: 7
    Last Post: 04-23-2011, 12:43 AM
  2. Isnít our financial crisis fair warning?
    By coberst in forum Philosophy and Spirituality
    Replies: 2
    Last Post: 04-29-2009, 01:44 AM
  3. Graphical Guide to Financial Crisis
    By ThatsWhatHeSaid in forum Politics, History, and Current Events
    Replies: 0
    Last Post: 03-15-2009, 02:12 AM
  4. [INTP] What do INTPs think of the world financial crisis?
    By Cypocalypse in forum The NT Rationale (ENTP, INTP, ENTJ, INTJ)
    Replies: 14
    Last Post: 02-20-2009, 07:32 PM
  5. This is a nutshell.
    By JediM05 in forum Welcomes and Introductions
    Replies: 10
    Last Post: 10-21-2007, 05:19 PM

Posting Permissions

  • You may not post new threads
  • You may not post replies
  • You may not post attachments
  • You may not edit your posts