The Present EU Economic Problem (and the Incipient USA One)

This started as a long comment at WUWT. I’ve decided to put it here as a bit of a rant / macro-econ note. From down in the comments on:

The Euro Zone is on the edge of a drop into deflation. “Why?” escapes them. Deflation is where the value of a currency rises, instead of falls, as it does in inflation. Now why is that? The news would lead you to believe it is due to the unwillingness of the Central Bank to print enough money and those nasty Austere Germans. But what causes deflation?

Folks not willing to spend. Lack of demand.

Now what might cause a lack of demand? That seems lost on the 1%. They have never heard of having a fixed amount of money to spend. The rest of us, though, know that we are spending all we have (and in many cases spent more than we had, and are still tapped out). “We” are not ‘buying more’ for the simple reason that we can not. No money. Not going to happen. Too many unemployed and too many only buying what they must and still being a bit short when the ’30s’ roll around… and sometimes even when the month is just a 28…

So having electricity ‘skyrocket’ and forcing folks to ‘decarbonize’ by taking more (paid / costly) transit and buying yet more expensive electricity (to replace the wood or coal or gas stove) just means there is that much LESS left over to buy, oh, I don’t know, maybe cars and shoes and bread… that causes demand to drop…

It will not matter if the ECB prints a few Billion more Euros and gives them to folks who own local banks to loan to folks who don’t need a loan and folks who own car dealers and shoe stores. Unless those Euros end up in the hands of folks who need to spend them, they do NOT stimulate demand. You just end up in what is euphemistically called “Stagflation”. The economy is still stagnant, but with a currency surplus causing money value to shrink. Sure, it isn’t deflation; but it is still broken.

That is the logical box the EU is in (and the USA is rapidly approaching). They have pushed the Keynesian Money Supply lever to the wall. And, thanks to all their OTHER policies, have not gotten any growth juice out of it. Now, puzzled, they wonder “Why?”. Perhaps because things like “necessarily skyrocketing” electricity prices move shoe makers to China and because out of work coal miners can’t buy new shoes anyway. At any price.

See, the basic problem is that there is only so much net improvement in total productivity per year (about 3% in good times with great progress, 1% in times of less R&D and improvement). That’s the total “extra take” available to The Power Elite. Period. Full Stop. But they want more than that (and the simple fact is that those ‘at the top’ have the position to get more than that). This works for a while, until those at the bottom are just too tapped out. But TPTB are none too bright about it, and figure if they got 6% last year, they can get it next year. Reality of a 3% max economic growth rate be damned. So they start to flail around for levers of power to move to “fix it”. ONE of them just MUST work!

But they can’t change reality. Postpone it for a year or three, sure… but
“Reality just is. -E.M.Smith” and that reality comes home to roost.

Now Keynesian Policy has great attraction here. Just print up some money and that makes it all better. But just like real heroin, this monetary ‘feel good’ only works for a while; then you need more of it. IFF you used that bit of time for real productivity improvements, you can start a beneficial cycle of virtue that gets real growth going and you can start back up that 3% / year improvement line.

HOWEVER: If you use that “stimulus” so that your friends and cronies get the money and benefit, and it does not go into real productivity improvements; you just wasted about 3 years and all the “juice” that was available from temporarily increasing the velocity of money. But, you see, here’s the hard part: It is NOT easy to identify things that are real productivity improvements. Whole industries try to do this. Some go out of business entirely in the process. At the end of the year (or decade) about 3% is the BEST you can average. Suck that up in hair brained stupidity like windmills, Solindra and Carbon Credits and you end up with net economic shrink, not growth.

Then more of that Keynesian Stimulus just gets you nothing (trending into deflation if low) or stagflation (if large). Since there is NO real increase in goods, services, and “stuff”, there just isn’t any more to share around between all the well connected and Friends Of Da Boss. Any that ends up there had to come from “the little guys” who just have to suck it up and buy less stuff. That, then, results in demand slide and eventually in that deflation / stagflation axis as the productivity trap bites.

FWIW, I think even Keynes knew this. He stated that such ‘stimulus’ could only work in the short term and that in good times money supply had to be shrunk back. Nobody in power pays attention to that part of his work…

At any rate, what must happen in the EU if they follow these productivity reducing policies is a net reduction in production, net reduction in buying power, and net reduction in demand. The only economic choice then is horrific StagFlation, or with anything like a sane stable money supply, Deflation. Either one really really sucks. Essentially the Keynesian Fix has worn off and the junkie can’t get enough to feel high again. It’s either withdrawl symptoms or pay a lot for enough dope to feel a bit better, but still be kind of strung out and getting sicker with each shot. (There’s a well developed Economic theory on this with lots of complicated names and all… but the idea is really that simple and giving it funny names of old Economists doesn’t make it clearer…)

So while TPTB slowly figure out they have all the chips and the other guys can’t cough up any more, the EU will stagnate at best and economically decay most likely. These climate polices can only make it far worse.

Also, FWIW, once things are bad enough, the usual outcome is some kind of war, strife, and social collapse. One hopes that Europe can avoid that this time. (Though the history of European wars makes that doubtful). There’s a reason Economics is called “The Dismal Science”…

BTW, don’t expect your leaders nor your neighbors to choose the path that works. It is uncomfortable and requires discipline. Taking more drugs until you hit bottom is the only path that sells… Just ask The Bernank…


A link on South Africa discovering the Stagflation Trap:

Zerohedge on the EU:

The Economist on EU incipient Deflation:

Note that they prescribe, no, demand! that the Keynesian Fix be applied in even stronger dose and blame the Good Germans for too much Austerity… Yes, that will prevent Deflation, but cause Stagflation (until such time as liberty and lower taxes lets small industry grow and the Little Guy get a bit of money ahead and buy something… but central banks can’t just print up a bit of economic freedom and lower taxes…)

The world’s biggest economic problem

Deflation in the euro zone is all too close and extremely dangerous

THE world economy is not in good shape. The news from America and Britain has been reasonably positive, but Japan’s economy is struggling and China’s growth is now slower than at any time since 2009. Unpredictable dangers abound, particularly from the Ebola epidemic, which has killed thousands in West Africa and jangled nerves far beyond. But the biggest economic threat, by far, comes from continental Europe.

Now that German growth has stumbled, the euro area is on the verge of tipping into its third recession in six years. Its leaders have squandered two years of respite, granted by the pledge of Mario Draghi, the European Central Bank’s president, to do “whatever it takes” to save the single currency. The French and the Italians have dodged structural reforms, while the Germans have insisted on too much austerity. Prices are falling in eight European countries. The zone’s overall inflation rate has slipped to 0.3% and may well go into outright decline next year. A region that makes up almost a fifth of world output is marching towards stagnation and deflation.

Optimists, both inside and outside Europe, often cite the example of Japan. It fell into deflation in the late-1990s, with unpleasant but not apocalyptic consequences for both itself and the world economy. But the euro zone poses far greater risks. Unlike Japan, the euro zone is not an isolated case: from China to America inflation is worryingly low, and slipping. And, unlike Japan, which has a homogenous, stoic society, the euro area cannot hang together through years of economic sclerosis and falling prices. As debt burdens soar from Italy to Greece, investors will take fright, populist politicians will gain ground, and—sooner rather than later—the euro will collapse.

This parrot has ceased to be

Although many Europeans, especially the Germans, have been brought up to fear inflation, deflation can be still more savage (see article). If people and firms expect prices to fall, they stop spending, and as demand sinks, loan defaults rise. That was what happened in the Great Depression, with especially dire consequences in Germany in the early 1930s.

They, of course, lay the blame on ‘expectations’, but ignore simple “no money in the pocket” reality that drives down demand. How do I know that’s what it is? As I’ve watched my cost of chicken rise from $0.89 / lb to $1.39 / lb and my cost of gasoline go from $2.70 / gallon to $4 / gallon and my income go down / hour; well, I’ve had to “buy less stuff”. My expectations of future prices be damned. (Lately gasoline has dropped back a bit, but is still high). Now I make more than the average guy. So as I am feeling it, they certainly are. Once you have over 75% of folks in this basket (my guess on where I rank), well, it’s a pretty large basket.

Sidebar On Marx: Some of you may notice a bit of Marxist Dogma that is similar to this (but dressed up in a lot more wordy language). Yes, Marx did talk about this behaviour; but in far more limited scope and without the benefit of knowing Keynesian Economics. He also had a lot of other bits quite wrong. So I’d rather avoid a digression into Marx and the economic disparity issues. He saw this problem, but came up with entirely wrong ‘solutions’.

In Conclusion:

So we’ve got the world in a bit of a pickle.

Mostly due to the West being all Keynesian Stimulus as their only ‘fix’ while enacting policies that assure it will fail into either stagflation or deflation.

Somewhat due to China being given free run to raid our economic systems with Mercantilist Policies.

Some from squandering a load of wealth on capricious wars (net destructive, not productive) and a moderate amount from pushing “Green Polices” far past where they were net benefits to the world and into the land of strong negative economic forces.

You can’t suck 10% out of the economy and ‘fix it’ with Keynesian Stimulus. You have at most 3% to work with. Then it’s off to stagflation / deflation land. But since the whole thing is dirt slow and takes a decade to get bad, and the Keynesian Drug makes you feel better for a couple of years; well, it can take 20 years to be fully broken, and then 30 to get back out. Most folks can’t wait that long. So “watch your back”, it’s gonna be a bumpy ride…

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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90 Responses to The Present EU Economic Problem (and the Incipient USA One)

  1. philjourdan says:

    I found this blog while researching the AGW mess. I stayed because of articles like this dealing with economics (of which you richly deserve more acclamation than you have received).

    Perhaps it is because you echo my own thoughts on the subject, but express it more eloquently. But we are not always in perfect sync. However this time we are. I penned the exact same thing on another blog about 2 months ago (I have been a relative hermit recently due to work). EXACTLY!

    Germans, while smarter than many others, still have the same fault prevalent with all European nations – ethnocentrism. So they are going to do what is best for Germans, not what is best for the EU. In good times, the 2 are synonymous. In bad times they are not. But I doubt even if the Germans took the continental view (versus the statist view) they could rescue Europe as the rot is spread too far and most of the rest of the continent does not even have their foresight.

    This is the Europe that Obama is trying to bring to the US. And he has succeeded to a degree. The US has not collapsed yet due to the fact that a might oak does not topple once the rot has set in. it does take time. But when they crow about the creation of 230k jobs, yet 250k of those new jobs are part time, and 300k new workers were over 60, there is a problem (the math looks funny because the US is still losing real jobs). That was the highly proclaimed jobs report for September! But what it tells the intelligent is that while the government figures an inflation rate of 10% for spending purposes (and that is much nearer to the actual rate than the proclaimed rate), it posts a rate of 1.5% for benefit purposes (for those who earned their benefits, not the welfare crowd who has seen a 30% increase in the first 5 years of this administration), which means the retirees are getting squeezed, and heading back into the labor market, part time, to supplement their monthly income. And in so doing, they squeeze out the young from the labor force, forcing young unemployment to skyrocket. They have 2 advantages over the young – experience, and less demands for benefits (they have insurance from their retirement).

    it is a perfect storm shaping up. And those of us who have seen it coming have been screamed down by the sycophants in the media and of course the administration/IRS/NSA (which are used for just that purpose now – Big Sis was not a random name – just a play on Big Brother).

    We already have Stagflation – hidden by the Houdinis of government. Every working stiff has seen that over the past 5 years. Wages are stagnated. Prices are increasing. And the middle class is disappearing (the Rich will always profit – as you can profit from both an up and down market – just ask Soros).

    Perhaps this is better that a socialist is in the WH, so that instead of a slow peal of the bandage, there is a quicker rip. The first world has been in love with socialism since academicians found they could live off of others and produce nothing. Global warming was a means to that end, but that was the slow road. The first world is coming to the cross roads. And rapidly – within all our lifetimes. We can sink into totalitarianism, or throw off the shackles of government imposed slavery and start working again. That time of reckoning will not be a cake walk, but it will be here.

    And the choice will be? I think anarchy will reign before the socialists give up the reins of their power. Perhaps man will be smart enough to avoid that death trap. I do not see it however. We will fall over the cliff because of ignorance, sloth, greed and avarice. And it is not the producers that I am talking about.

  2. Ian W says:

    The real problem is that there is a Type error Money is NOT Wealth.
    The parasites in the finance world have all worked out how to create more Money, but they are not creating Wealth so the Money units represent less and less Wealth.

    Wealth is based on producing things that then can be sold and replaced by the representation of those ‘things’ in Money. Reduce things being made and increase Money and Money becomes worth less, and eventually worthless.

    So why are less things being produced? It is not financial, although that will have an impact, it is regulatory. Unfortunately, for economists and financiers and bankers and they can only work in money terms and so as they only have a hammer everything needs pounding.

    What is really needed is to remove all the stupid regulations and the even more stupid bureaucrats who invent and enforce them. A small business owner now spends more time and effort trying to ensure that the business meets regulations than actually doing the business or the research or chasing new possibilities and customers. Small businesses are ~70% of the workforce yet they are repeatedly dumped on by everyone from the IRS to local council bureaucrats. The problem is bureaucrats feel that everything can be cured by more regulation and it has never worked that way.

    Financiers and economists can never solve the problem of insufficient wealth creation all they can do is make things worse. Bureaucrats and agencies are parasites that are killing their host with over regulations on everything from permission to drill an oil well to the height of the sink in the restroom.

    One way out perhaps would be to link the pay of the bureaucrats to the productivity of the small businesses in their area (geographic or subject). So if EPA puts regulations on power generation companies and those companies fail, the EPA regulators are sacked. If the local IRS has less successful small businesses in its area of Kansas that it monitoring then the tax inspectors and office workers pay is reduced. etc etc. At the top level Federal politicians and bureaucrats should have their pay linked to the growth rate of the economy – if it grows they get a pay rise if it shrinks they get a pay cut. Because these people do not understand that the wealth producers are where their pay comes from they have to be made to understand it.

  3. M Simon says:

    Endocannabinoid medicine if fully exploited could reduce medical expenditures by 1/4 to 3/4s. But that is outlawed.

    The Forth language could reduce the cost of real time control software considerably. But it is an “obsolete” language and is not taught or favored.

    Its not as if we don’t have significant places to improve productivity. It is just that such improvement would upset too many apple carts. So we are “stuck”. Such stuckness will not last forever. But while it does it will hurt. A lot.

    The ins are always trying to keep the outs out. Look at how long it took the germ theory of disease to propagate. Or antiseptic surgery.

  4. Jason Calley says:

    philjourdan says: “I found this blog while researching the AGW mess. I stayed because of articles like this dealing with economics ”

    Let me echo that praise — and add that it is not only the well thought posts from E.M., but the well thought comments from people like philjourdan and Ian W. I am grateful to have access to all the wonderful brain-power found here. (Having said that, I personally reserve the right to be wrong or foolish. In fact, it is a right that I exercise often!)

    E.M., you make a very important point, and one that many economists from Marx to Keynes either missed or downplayed. Not all work is equal. Some is creative and productive, but some is useless, or even an actual drag. So, how can we decide what is productive and what is useless? In the end, the seller and the buyer decide what is valued and desired, and assigning a price to something is the mechanism by which seller and buyer may work to a mutual (not one sided) advantage. Creation of fiat money placed into circulation (regardless of whether the creation is good, bad, wise, or foolish) distorts the ability of the market to assign prices that accurately reflect real desires. Injection of governmental subsides (regardless of whether the subsides are good, bad, wise, or foolish) distorts the ability of the market to assign prices that accurately reflect real desires. Creation of industry restrictions and regulations (regardless of whether the regulations are good, bad, wise, or foolish) distorts the ability of the market to assign prices that accurately reflect real desires. Artificial control of interest rates (regardless of whether the control is good, bad, wise, or foolish) also distorts the ability of the market to assign prices that accurately reflect real desires.

    Once the market pricing function is no longer able to reflect how much people actually value a product or service, manufacture of goods and provision of services will be increasing steered into less-than-optimum uses. As the market becomes more and more distorted, you will eventually see good, hardworking people voluntarily leaving the market. “Why should I run my own business when all my profits are taken away by overhead?” or “Why should I get my car fixed at the shop when it costs so much that I can do it cheaper myself even considering it takes me all day to do it?” The most productive among us are the hardest hit, and going Galt looks better and better…

    Meanwhile, the politicians and bankers will try desperately to stop deflation by doing more and more of what caused the problem in the first place. They will never realize that deflation is not the problem. Deflation is the system’s attempted cure, it is the last effort of the free market to purge itself of the inefficiencies brought about by financial parasites.

  5. M Simon says:

    A classic case of the ins working to keep the outs out:

    Surprisingly enough it concerns opiates.

  6. philjourdan says:

    @Jason Calley – Include your comments in that group.

    As for:

    “Why should I get my car fixed at the shop when it costs so much that I can do it cheaper myself even considering it takes me all day to do it?”

    That is a very basic economic principal – what is YOUR time worth. In other words, taking all day to fix a car is worth it to the person who does not have the $200 for repairs, but has the time (we can leave out the hobbyist for this discussion). If you have all day to work on a car, but not the $200, then your time is not worth $25.00/hour (500/8). Except when you do something that most pay someone else to do. You probably do it yourself (or have done it). When you were young, you changed your own oil in your car (you had lots of time, and little money). As your income increased, you found your time worth more (even if not working – leisure time is paid for by your work), so it was cheaper for Jiffy Lube to change it.

    It works on the down side as well. If you have been downsized (salary), your time is then worth less. So what you paid to have done before (lawn company, maid service, oil changes), you do yourself as your time is worth less than the money you spend.

    This is actually a demonstration of the way almost everyone makes economic decisions throughout their life without ever having to know about economics. It is not that old people CANNOT do less, it is often that they value their time more than the young, and thus are willing to pay the mechanic to fix the car, deciding instead of use their time in pursuit of another endeavor.

  7. Jason Calley says:

    @ M Simon Just as a general rule of thumb, in most complicated systems, things do not happen for simple, single reasons; there is usually a confluence of several things that all reenforce each other to create the new system state.

    Why is marijuana (and hence, the cannabinoids) outlawed? Certainly, the pharmaceutical companies profit from it. And the alcohol companies. And the synthetic fiber companies. And the law enforcement groups. And the prison industry. And the drug cartels. And the banks (by laundering money). The list goes on …

  8. p.g.sharrow says:

    You have struck something I have been ranting about for several years. There is no money out on the street. The Federal Reserve pumps money into the banks and then requires the banks to keep large reserves and limit risk to only the best stocks and bonds. This is enforced with constant “Stress Tests” to insure that the banks are well financed, Wall Street and the government gets cheap money and Main Street can’t even qualify for a loan application. The bankers claim that there is little demand, but, If you ask the local bank they say we can not accept applications. Small business owners have been forced to self finance any expansion from after tax income. We have a small beauty spa that caters to middle class. Used to be they had services every week or two. Then it was every 3 or 4 weeks. Now it is every 4 to 6 weeks as they hoard their funds to pay for food and fuel. Small business shops are becoming see throughs and Their former owners are searching for employment at any price.

    It is nearly impossible to start or expand a business due to local and regional regulation. Big business owners and investors claim that high taxes on their profits stands in the way of investment and expansion. BULL CRAP! Regulation is the biggest road block to real wealth creation. Bureaucrats always strangle the society they “manage” ALWAYS! They have to, it is their nature to demand greater control and greater funding to do less actual work of permitting enterprise. Throughout history, every 300 years things collapse due to bureaucratic road blockage and their waste of the peoples wealth creation on monuments to the greatness of the ruling class. WE DON”T NEED THEM! Civilizations always prosper before the creation of the Bureaucracies gain power. We don’t need them to succeed! pg

  9. philjourdan says:

    @p.g.sharrow says: 28 October 2014 at 1:43 pm

    You bring up an excellent point! And the reason that venture capital is now a crowd sourcing concept. The rules are made by the government to the DETRIMENT of small business, not big business. And while big business does hire some, the vast majority (not to be confused with the vast right wing conspiracy that never creates any jobs according to Hillary) is done by small businesses. And they are the ones being squeezed both by government regulation, and the lending requirements.

  10. Jason Calley says:

    @ philjourdan “It works on the down side as well. If you have been downsized (salary), your time is then worth less. So what you paid to have done before (lawn company, maid service, oil changes), you do yourself as your time is worth less than the money you spend.”

    Yes, exactly, and as E.M. points out, we have that situation in the EU with demand for goods and services being down. People can no longer afford to spend their income on anything but the necessities. The natural free market response to this is for sellers and service providers to cut their prices so that even in fiscally tight times, they can get enough business to stay open. Money would still be tight and the companies that were producing stupid stuff (“stupid stuff” is a technical term of art meaning “things that people do not want if they have to actually pay for what the blasted thing cost to make) would liquidate and their assets bought cheap by better managed companies. If the politicians and central bankers would just keep their hands off the market it would sort itself out. But they won’t. They will pump in more money, more laws, and will manipulate interest rates — and that will NOT solve the problem.

  11. p.g.sharrow says:

    @EMSmith; Read an Economic essay once , many years ago, on bankers making loans. The gist of it was as interest rates increase, loans were easier to make and as interest rates decreased loans became more difficult to get. The reason was the cost of servicing the loan as well as the costs of loan loss provisions. Bankers needed at least 3% spread between cost the of money and ROI on the loan. As the loan risk increased the ROI must increase. The risk of loss meant no loans could be made for less then 3% ROI while 10% meant many risky loans could be made.
    A banker once told me that he would be glad to make a loan for $100,000 @6% but not a loan for $10,000 @ 10%, because larger loan would return more money for less work in loan servicing. At the time, money cost the banker 3%. That was the time the B of A shut off all loans to farmers and small business in California to loan $6 billion to Mexico. Mexico later said tough! We can’t repay it! The U.S. government had to refinance the loan to protect B of A and Mexico from the default. pg

  12. E.M.Smith says:


    This weekend I had a tire replaced. I did the dismount from the vehicle myself, and rotated one tire off of an ‘out of service’ car onto the Banana Boat. Now, did I WANT to spend Saturday being a ‘tire jockey’? Not particularly. (The tire prone to ‘leak down’ was taken to a tire store and reseated / new valve stem. $25 all told.) So I now have 4 “good enough” tires on the car, and a spare that may or may not have had the leak fixed. I’d have rather spent $80 and bought a new tire and had them do all the work. But I don’t have $80 for that.

    This next weekend I’m going to take off the rotor cap and clean it. Polish the end of the rotor. Smooth and regap the points. I’d rather pay the mechanic $100 to do a real tune up; but I don’t have that $100 right now. So I’m doing what I did in high school and college…

    But there is more…

    December 3rd my present contract ends. Why? IRS rules about contractors becoming implied employees if you keep them around too long. I’d be happy to stay in this job as a contractor. I’m good at it, and it pays reasonably well. But “rulings” mean I can’t. Even if the employer is happy (they are) and I’m happy… So, due to IRS rules and regulations I must become unemployed in about 6 weeks. The “new guy” will need at least 2 months to come up to speed. All that helps the overall economy and efficiency how?

    Think I’m going to be out spending money when I need to assure I have “getting home” money? If I can’t find my next ‘gig’ in Florida, I need enough to get back to the house I own in California…. That money will have ZERO velocity of money as it stacks up and waits… Discretionary spending goes to ZERO as the deadline approaches.

    Oh Well…

    Oh, and employers don’t want to hire folks when the cost of getting rid of them is too high. So it is also harder to find the next ‘real job’ as everyone is unwilling to commit.

    Slowly the thing ossifies and locks up.

  13. Larry Ledwick says:

    In addition to the above, you have another issue dropping demand. Especially when money is tight, demand drops when all your basic needs are satisfied. In an economy based on perpetual consumption, what do you do when almost everyone in the society who has the financial resources to buy things, already have all the “stuff” they need? While at the same time the folks who are strapped for cash also have the “stuff” that they absolutely need?

    The guys with money buy stupid stuff like remote islands and expensive yachts that they hardly use, and the “poor folks” are not hungry enough or desperate enough to riot in the streets so they just hunker down and get by as best they can while their blood pressure slowly rises.

    At least a few of the 0.01% understand this. One wrote this article.

    Our economy (the world economy) is predicated consumption and growth, it has now model for steady state happiness for all. For the economy to work as “intended” like it did in the 1960’s before social stresses started to fragment the dreams and expectations, everyone needs to need something and have the cash to buy it. If that condition is satisfied, then someone some where will figure out a way to fill that need and both the buyer and the seller will benefit (as long as there is no third party poisoning the transaction (government or some business competitor who wants to throttle competition).

    You can see it clearly in the fed funds velocity of money graph.

    All that money being pumped into the economy is being smothered under lack of velocity. It is going into some huge black hole where it does not get recycled into the economy as productive investment. Folks on the low end of the economy are too scared or too poor to spend money on anything but the stuff they really need and the rich have run out of productive stuff to buy.

    Want another kitchen stove or washing machine ? Gee honey lets hold off on that, the current one will last a little longer and I am worried about if I will still have a job in 2 years, and we are going to need new tires on the car soon.

    This also drives a race to the bottom for the cheapest goods regardless of quality. If you really really need a car to get to work, you buy what you can afford (or finance) not what you want. This is one of the new bubbles currently inflating, lots of money is getting funneled into high risk debt for auto loans. Thanks to the clunker program lots of perfectly good used cars got shredded so there is a shortage of good reliable used cars at affordable prices. The economy is just good enough that folks are getting sweet talked into buying more car than they can afford because they have done without a nice reliable car for almost 7-8 years (just like in 2007 they were talked into buying more home than they could afford).

    Simultaneously due to the housing crash, lots of folks are renting that if they could qualify, would be paying for a home at half what they have to pay to rent similar floor space. The affordable starter home has disappeared and unless you can swing a $250,000 mortgage you can’t buy a home and have to rent. This is building a bubble in multi family homes. I see rental units going up all around the area I live. In a few years that will be over built and they will be doing the same thing they did just prior to the IT crash where they were giving away 3 months rent to get folks to move into rental units as people started to buy homes left and right and the rentals were struggling to pay basic expenses with all the vacancies.

    Our economy is moving into a period of unstable oscillation, like an electronic circuit operating too close to its limits. Instead of running steadily at its design limits it wants to oscillate violently at every little bump in supply voltage or change in audio level pushes it into ear splitting feed back.

    Lots of people are just hunkering down and watching to see which little bump causes it to blow a fuse, and hope they will not get caught in the flash over as things melt.

  14. R. de Haan says:

    Just connect the dots.

    We have arrived in an era of social and economic transformation.
    The end of the consumer economy and the ‘obsolete’ masses.

    This is UN Agenda 21 being executed.

    These idiots think 500 million people is all the planet can bear.

  15. Larry Ledwick says:

    And as if on cue :
    Sweden cuts interest rates to zero

  16. R. de Haan says:

    philjourdan says:
    28 October 2014 at 11:27 am

    “Germans, while smarter than many others, still have the same fault prevalent with all European nations – ethnocentrism. So they are going to do what is best for Germans, not what is best for the EU.”

    I really doubt the claims about German smartness.

    Germans have this historic vulnerability to cave in on any propaganda you throw at them.

    So completely ignoring the horrors brought on them by Hitler and Goebels, they now find themselves in the firm claws of a former OSSI Bundes Chancelor named Merkel (what could ever go wrong) and find themselves in another propaganda rooted scam called “Energiewende”.

    In the meantime the average German family leads the poor house index just above Rumania in terms of assets and in terms of broadband availability Germany is at the bottom of the list which by the way is led by South Korea.

    Within it’s borders is the German bank dragging a mill stone of liabilities approaching the incredible sum of 67 trillion USD which is 10 times the German GDP, 7 times the Eurozone GDP and over four times the US National Debt.

    Still most Germans I have a chat with believe the financial crises didn’t bite Germany because most Germans are dedicated savers but the total sum of all saving accounts put together is only a factor 1/100 of the liabilities of the German Bank.

    In short, the Germans are not only ‘not smart’, they’re broke too, just like their infrastructure.

    Germany has become a badly planned Plan Economy where an average family needs three or even four jobs to meet the bills. Over a million families have arrived at the point where they have to make a choice between food on their plate or paying the electricity bill. Trend steeply rising.

    Just a few signs to illustrate how desperate the situation really is:

    Latest proposal from the Merkel Government was to introduce a road toll for all foreign traffic and an additional “use of airspace fee” for air traffic including recreational flights.

    Some ‘Bundesländer’ now have introduced a tax on the amount of rain that is falling on your house and your garden.

    Now if you think mass protests break out, just forget all about it.

    People simply pay or go bankrupt silently and in shame.

  17. R. de Haan says:

    Also worth a read:
    we don’t have one problem, we have three interlocking sets of problems:

  18. Jason Calley says:

    @ R. de Haan “These idiots think 500 million people is all the planet can bear.”

    Or, alternatively, they think that about a million servants each is enough for themselves and 499 of their buddies.

  19. R. de Haan says:

    I really think we are arriving at the end of this social, ecomic and financial system.

    Only the re-invention of the wheel could save us….(LOL)

  20. philjourdan says:

    @E.M. – What you are describing is a restriction of the market, by government, for some perceived good intention. And as with all things government, it is a failure. They wanted to force Microsoft to hire more people. All they did was create greater turnover.

    They wanted to force employers to pay more in benefits. All they did was make fewer people eligible to receive them. And the victims do not all work for “MS” or “cap one”. Many work for Colleges and Universities! The egg heads found out that the laws of economics will not be denied, even in the hallowed halls of no work and all pay colleges.

  21. R. de Haan says:

    E.M.Smith says:
    28 October 2014 at 3:23 pm

    “December 3rd my present contract ends. Why? IRS rules about contractors becoming implied employees if you keep them around too long.”

    We have the same shit here in Europe.

    Is there any possibility like we have here in Europe to incorporate and rent out yourself with a corp. (a 50 USD Delaware) as a contracting party? Some have made a “pool” of co-conractors, established in two or three corporations, a nice web site providing contracting their services and continued as usual.
    Contractors simply jump from one corp to the other. So one period they are rented out by corp. A, a few months later by corp. B and so on.

    It works here so maybe it could work in the USA as well.

  22. Jason Calley says:

    @ R. de Haan
    Good article you link to above

    I found this to be a pertinent quote from it:
    “Median-income families in only one major city [Washington DC] can afford the average price Americans are paying for new cars and trucks nowadays.”

    Washington DC, huh? Who would have guessed? I guess when you live in an Empire, it pays to live close to the Emperor.

  23. R. de Haan says:

    Of course the company has to be billed by the respective corporation for the services so no specific name of an employee listed in their administration, just selling contracting or consulting “hours”.

    Most companies are very happy with such a solution.

  24. philjourdan says:

    @R. de Haan – You quoted me, then misquoted me.

    “Germans, while smarter than many others,”

    Smart is a subjective term. Smarter is objective. All you did is put up an argument that they are not smart. not that they are not “smarter”.

    I just wanted to point that out to you, as I do not want to detract from this article by getting into a debate about one ethnicity over another.

  25. R. de Haan says:

    Jason Calley says:
    28 October 2014 at 6:01 pm

    @ R. de Haan
    “Washington DC, huh? Who would have guessed? I guess when you live in an Empire, it pays to live close to the Emperor”.


  26. Jason Calley says:

    @ E.M.
    Here is a quote from Nobel Prize winning economist F.A. Hayek, which seems to back up your post:
    “To combat depression by a forced credit expansion is to attempt to cure the evil by the very means which brought it about; because we are suffering from a misdirection of production, we want to create further misdirection — a procedure which can only lead to a much more severe crisis as soon as the credit expansion comes to an end.” ~ Friedrich August von Hayek

  27. R. de Haan says:

    In the mean time a friend of mine in the Netherlands has developed a fiber broadband design for rural area’s based on WDM PON technology.

    I know it isn’t easy to get a new initiative from the ground in the USA today but maybe this could present an opportunity.

    I’ve just translated his entire business concept in German and do the english translation within the next weeks.
    Besides the cheapest possible fiber broadband concept he also developed a cooperative model where the introduction of broadband is taken on as a community project.
    The interesting aspect is that that the structure of the roll out doesn’t need tens of thousands of connections but is suited to serve smaller clusters from a few hundred up to 3.500 homes/businesses connected and industrial area’s.
    If 60% of such a cluster signs up in advance the project is feasible and profitable serving communities with a 1 Gbit/s connection up/down and (free) wireless service for the area allowing farmers, corporations and families to apply all the benefits of fast internet access, remote sensing, ip security camera’s etc. At this moment in time non of the big operators are interested in serving the rural area’s so there is hardly any competition.

    Just let me know if you’re interested by sending me, rondehaan an e-mail with my name @ If you want to contact me directly I can send you my Skype address.

  28. R. de Haan says:

    Signs of delusion:

    Obama is ignorant or hiding the truth:

    Talking about Deutsche Bank:

    The stress test is bogus and the system totally bankrupt.

  29. E.M.Smith says:

    @all: I’ll comment on your comments later this evening.

    @Larry Ledwick:

    What a fascinating graph…. About what I’d imagined, but with a much steeper rise / bubble and a very much stronger drop / plunge. The velocity of money is just in a hard crash.

    For those not familiar with why this matters:

    Typically it is seen as something like:

    V = PQ / M where V is Velocity, P is price, Q is quantity of stuff (product) and M is money supply.

    It is something of a tautology. P x Q / money gives how many times it changed hands.

    $5 x 10 things / $2 = 25 times that $2 has to change hands to cover $50 of stuff.

    The basic idea is that the sum of all good and services traded and the number of currency units (say, dollars) avaiilable, taken together, give you how often those dollars change hands. That is, the velocity of money. So, say you have 10,000 units of stuff, and they cost $50 each. They will all sell when 10,000 / 50 or 200 times that $50 changes hands. If you only have $50 in the economy, it has to change hands 200 times (in one reporting period… call it a year). So in that case the ‘velocity of money’ would be 200 ‘turns’ per year.

    Now what happens when you produce another 10,000 units / year? Either the velocity goes up to 400 ‘turns’ per year, or the price drops to $25 each, or you print more money…

    Alternatively, if folks stop buying stuff and sit on their cash, the velocity of money drops. If, in our example, it dropped to 20 ‘turns’, you could either sell 20 x 50 = 1000 units (leaving the other 9000 unsold) or you could have the price collapse. So havinjg a big money supply velocity slowdown is a very big deal. Either rampant stagnation / recession is indicated, or prices collapse in a resounding deflation. Neither is particularly good.

    The classical Keynesian “stimulus” is largely just intended to substitute velocity from government spending for private velocity. (In reality, it can end up in a race condition where more government spending (velocity) is offset by less private spending (velocity). The net is not clear…

    At any rate, with government spending like an alcoholic sailor who can’t count, and the velocity of money in near free-fall, and interest rates ‘near zero’ (and not much borrowing anyway); things are rather like I described, only far more so than I’d thought…

    P * Q / M is plunging, so is P plunging ( prices in freefall deflation ) or is Q plunging (not a lot of stuff being bought – recession) or is M ballooning at an astounding rate?

    Another way to write it is:

    VM = PQ

    If V is plunging, either the M is getting huge, or the PQ on the other side is dropping. (Or some combination…).

    We know that M is being pumped, but it is moving ever more slowly. We also know P is rising a bit in the USA (mild inflation). That leaves the Q side. Where I’m asserting that folks are buying less stuff since they have a fixed bit of money and P is going up.

    Now think about it… if the problem is too little Q and too small a V:

    How does printing buckets of money to sit in banks either increase Q, decrease P, or increase V?

    It doesn’t do any of those.

    And that is why that plunging Velocity on that graph is rather disturbing… Government can keep on printing buckets of money, but V can drop faster… and in the end, that means PQ must drop. Either as deflation ( Prices drop ) or as recession ( Quantiy bought drops ). Or both ( stagflation).

    They ought to be concentrating on the V. Loosening regulation so banks and companies can start moving their money around. Reducing taxes so folks have more to spend.

  30. Svend Ferdinandsen says:

    Good points.
    Anyway i have a comment regarding inflation. I believe that part of the standstill is lack of inflation and not only lack of productivity. With a very low inflation and also no increase in productivity, you get a locked society. Any fail you do will be felt many years ahead. If you have employees and raise the pay too much, you have hardly any way to repair it than to fire some. It is nearly impossible to lower the payments, but it is easy to give a raise a bit lower than the inflation.
    A small inflation will make live much easier. I feel that the only sector that gains of the low inflation is the banks.
    When i was young(er) the inflation was maybe 5 to 10% and the interest on loan was 18%.
    Somehow it worked pretty well, even if the productivity not kept pace with the inflation.
    I dont know where the sweetspot is and i dont know how to make it happen in a controlled manner.
    But zero inflation and zero interest gives somehow a very static society with no development.

  31. Power Grab says:

    What a timely article! I was just pondering this past week the question of whether the PTB are deliberately sucking all the money out of the economy. Could it be they are trying to prevent run-away inflation? Do those who are running things remember those days? Is that their greatest fear?

    Or, along another line, are the ME folks running our banking system now? Their religion prohibits usury, does it not? But I would have thought that was only to “benefit” the people on their side of the fence. I remember in the mid-1980s my sister’s mortgage rate was around 14%. How many years have they kept it down in single digits now? Of course, back then she actually got a mortgage. A friend was selling a house and thought I would be a good buyer. She recommended her favorite banker to me. I filled out the paperwork and never heard back from the banker, even after trying many, many times to reach her. She never even gave me the courtesy of telling me I didn’t qualify.

    Or, along still another line, are the PTB just that stupid and selfish as to assume that all the peons at the bottom can continue to pay every last dime for their stupid green initiatives (in the form of sky-high electricity costs, and indirectly, from loss of jobs and businesses) and so-called “health insurance”, yet still have ready cash to pay for a home, or a new car, new shoes, or even one beef pot roast a week?

    The discussion of the importance of creating wealth (not just money) also came to my mind. Actually, it comes to my mind more in the form of “We don’t create much in this country anymore. Could that be the reason the power brokers keep pushing the stupid green initiatives; there’s no other way to rake in lots of cash? Oh, aside from outlawing things that the middle class does, so they can haul them in and make work for the lawyers and prisons?” I’m not even sure medicine is going to be a reliable money-maker anymore, unless you count on the increased stress everyone is being subjected to, which eventually will lead to the deterioration of their health.

    After pondering those possibilities, I always return to the idea that the PTB simply want everyone and his puppy dog to have to borrow as much money as possible for even daily expenses. Needless to say, that is a not a sustainable way to live. I’m sure everyone here knows that without my having to even say it.

    Finally, does anyone here have any idea what the current financial situation (worldwide) is going to have on the initiative to replace the American petrodollar with some other currency?

  32. Larry Ledwick says:

    This situation sets up some interesting possible out comes.

    What I think is going on.
    Feds pump money into the economy. Joe average worker is living pay check to pay check and worried about his job. Living on credit cards and having trouble paying them down to get some wiggle room. As a result he is very cautious about what he buys.

    Net result consumer spending is way down, but although the official rate of inflation is very moderate 1.7-2.0% in the official numbers.

    Inflation is appearing in the segments of the economy that constitute “must buy” items like food, milk eggs etc. but those have been dropped out of the inflation calculation as I understand it.

    So where is all that QEx money going?
    The big players are sucking it up like a vacuum cleaner and all the major corporations with few exceptions have been buying up their own stock with this “free money”. Are they doing this because they think it is a great value? Unlikely, they like some big players in the 1929 depression are probably buying it up to prop up the stock price so the corporate officers can cash out their stock options and shift the inevitable loss to small stock investors who think the stock market is finally recovering and rushing back into the market to recover their losses on their 401K’s from the previous crash.

    If they thought the economy was recovering don’t you think they would be making capital investments to cash in on the soon to come boom?

    I think it is a rigged market so the big boys can keep things propped up long enough to cash out and leave the small investor holding the bag when the balloon finally breaks.

    In 1929 some very big and powerful investors basically went broke buying up their own stock to try to prop up the market and restore confidence. I think that is the game of musical chairs we are playing. The well connected PTB are looking out for themselves and their connections and rigging the system to allow them to corner their positions they want to capture or to reduce their exposure to the consequences of the collapse.

    Think about it, if large scale deflation occurs the folks sitting on cash and liquid assets will get fabulously rich as their horde of dollars will buy much more after the deflation that they will now. Especially when they can dump that cash buying fire sale properties and goods from people desperate to try to keep afloat and liquidate their debt which will become very very expensive as deflation makes each dollar of debt harder to pay off with more valuable money.

    If all this QEx money is getting stashed in artificially inflated paper assets like stocks, if the stocks crash it will simply vaporize and the real losers will be anyone who owes anyone any money (like the U.S. Treasury and consumers with debt). The big winners would be anyone with a reserve of liquid assets or cash. Historically the solution has almost always been massive write offs of debt that has no possibility of being repaid, but those write offs usually occur long after the little guy has been stripped of all his assets and his ability to earn money.

    The scary thing in my mind is that as we move from physical cash to electronic money there is now no physical barrier to the velocity of money, and when if things start moving either inflationary or deflationary there is no mechanical physical limit to how fast things can move. We have already seen hints of this in some of the mysterious flash crashes in the market which in some cases only last seconds, but what happens if one of those flash crashes causes the purchase algorithms to latch to the low limit and drive stock prices to zero. Market circuit breakers can only work for so long before confidence in the market breaks — once that happens it all disappears in a puff of smoke because a fiat currency economy is only as good as people believe it is. The real value of the economy is its essential goods, services, raw materials and manufacturing capacity. Magical empires like Facebook only have value because people think they have value, break that perception and all that evaporates.

  33. Jason Calley says:

    When all else fails, change the accounting standards! The UK was looking a bit dismal — but now it looks better. They just added drugs and prostitution to their GDP.

    Next thing, the politicians will be able to include drugs and prostitution on their expense accounts. You know, “stimulating the economy!” :)

  34. Power Grab says:

    @Chiefio, I seem to recall your saying that Mrs. Chiefio is a certified teacher. Since you picked up a fair amount of Spanish in California, I was wondering if Mrs. Chiefio did also. The reason I ask is that OKC is looking for bilingual teachers. This story broke last week.

  35. Sera says:

    Americans have, on average, 2.2 (?) credits cards. In Germany, only 1 in 20 own a credit card. This does not imply that they are savers, but does suggest that they spend within their means. Germans also have a tendency to repair their durable goods while americans just throw it out and buy new stuff. And then you have the french who do not use credit cards at all.

    This probably makes a difference during deflationary times.

  36. Truthseeker says:

    The irony in all of this is that the Eurozone and EU bureaucracy was invented by those who had lived through one or even two world wars and wanted to stop wars from ever happening again in Europe.

    Guess what fellas … making the productive poor and giving resources to the unproductive will give you exactly the opposite result … in time.

  37. R. de Haan says:

    Power Grab says:
    28 October 2014 at 8:54 pm

    “Finally, does anyone here have any idea what the current financial situation (worldwide) is going to have on the initiative to replace the American petrodollar with some other currency?”

    BRICS establish $100bn bank and currency pool to cut out Western dominance

    And as an alternative to the SWIFT system: Russian Central Bank to create its own domestic payment system

    Russia, China agree on more trade currency swaps to bypass dollar

    This IMO nothing less but a declaration of war with the USA (and Europe).

  38. M Simon says:

    It will not matter if the ECB prints a few Billion more Euros and gives them to folks who own local banks to loan to folks who don’t need a loan and folks who own car dealers and shoe stores. Unless those Euros end up in the hands of folks who need to spend them, they do NOT stimulate demand.

    In the US those on Social Security spend the money given them. The recent yearly increases have been paltry. If the powers wanted to get that money into the economy they could have made the increase larger.

  39. M Simon says:

    R. de Haan says:
    29 October 2014 at 5:19 am

    Who has the oil counts for more than what currency it gets bought in.

  40. M Simon says:

    Jason Calley says:
    28 October 2014 at 1:42 pm

    Well yes. A confluence of interests. I think Kondratieff was the first to quantify the cycle even if he did not ascribe all causes. The current phase of the cycle lasts about 20 years. And then the pressure for change and the backlog of research that can implement it takes off and we have another grand race to the next point of stasis. When the former outs become the new ins.

    James Watt delayed the introduction of the steam engine for 20 years with his patents

    In fact the whole idea of intellectual property is a drag on the system.

  41. M Simon says:

    Re medical costs – they are a big factor in the economy so I think some quantification is in order. Endocannabinoid medicine fully exploited is worth $1/2 trillion to a $trillion and a half a year. That latter figure represents 10% of the US economy. Stifled by laws against a plant. And that stifling is supported by the right in America (mainly). Those who claim to be paragons of economic understanding. I know some of those folks quite well and when I bring up the medical benefits (which they don’t dispute – they are not stupid – in the small sense) they come back with “b b but getting high”. As if the laws stop that. Well at least some people get punished for their “sins”. And that is the most important thing to them. Punishment. Well the prison-industrial complex is doing well.

    And that economic accounting does not even count side benefits like a 10% reduction in traffic accidents from fewer alcoholics on the road. Or a 50% reduction (minimum) in prisons.

    Fortunately things are changing. The medical benefits (even if small so far) are undeniable. And we now have some 30+ states with medical cannabis laws – about 9 or 10 states early this year passed cannabidiol laws for childhood epilepsy. Why? Well cannabidiol doesn’t get you high. And the efficacy is undeniable. So much so that the Governor of NY has asked people to violate its laws so the children can get help.

    Unfortunately for the ‘wingers’ THC (which gets you high) in conjunction with cannabidiol (which doesn’t) is a treatment for cancer. And other than the high, the body tolerates the stuff quite well (unlike chemotherapy) because they are analogs of natural endocannabinoids (anandamide and 2-AG).

    I brought up some of this on a Guardian thread and the complaint I got was that all the information available in layman’s terms was from “junkies”. That will be changing. I have been in contact with a very prominent blogger who may be in the process of doing an article. We shall see. And if not that blogger there will be others. The science is solid.

  42. M Simon says:

    And further (if I haven’t already bored you to death) – medical schools don’t teach the endocannabinoid system. It is disreputable because of its association with cannabis. Despite the fact that the human body has more receptors for endocannabinoids than any other type.

    We are at a stage similar to early stages of the germ and antiseptic theory of diseases. It is disreputable. That won’t last. And we will look back on this era with wonder. The same way we look back on that earlier era. “How could they be so stupid?” “How can culture trump knowledge?” Well it does. And it adds considerable friction to our economics.

    Which is to say: our problems are not economic in the sense of money flows and production. They are cultural. And the people on this blog know it well. Which is why – around here – “Green” is a reviled term and a description of a failed human who is inadvertently killing others.

    But Greens aren’t the only death cult in America. We also have Prohibitionists. Because belief trumps reason. At least for a while. And the root cause is common. A belief in utopia. No such place. But you knew that. You know the refrain: “If only we could stop fracking” or “only natural is good” or “if only energy was more expensive” or “If only people didn’t use (unapproved) drugs to get high”.

    And the greatest con? Neither ‘side’ sees itself as a mirror of the other.

  43. M Simon says:

    The real value of the economy is its essential goods, services, raw materials and manufacturing capacity.

    The maker movement is moving the means of production into smaller and smaller units. Cheap 3D printers, cheap CNC mills and lathes. I’m working on some electronics to reduce the price and increase the capability even further.

    A table top CNC lathe or mill can be done for about $1,500 or less. A bench top mill can be done for about $2,500.

    Contact me if you are interested.

  44. E.M.Smith says:

    Well, had a short sleep ( 5 hours ) after a nice-if-frugal evening with the spouse (free entry to the park as she is an employee and dinner at a middle-ish restaurant there ) and find that all sorts of folks have added comments faster than I can keep up! Guess economics is of interest!

    Ok, I’ll take a crack at catching up, but I have to go to work “soon” (and start the daily drudge all over again…)

    First, a reminder: “Never attribute to malice that which is adequately explained by stupidity.” While there are some very crafty AND very evil folks in the world, and their malice does account for much that is evil; IMHO it is the stupid that burns most brightly.

    I’m a fairly bright cookie. I, too, have had my stupid moments and fight against them on a daily basis. I’ve met a lot of very bright folks. (Met Ronald Reagan once. And a senator or two. And some of the Kennedy Clan. And a load of company V.P.s and Presidents.) It has been my observation that none of them understood the physical world anywhere near as well as I do. Ditto the actual economy. At some point in the move up the management / government food chain, what matters is all social skill. Who can you manipulate to get what done. How do you get someone to value you. For things like “how the economy works” or “what makes light”, you have staffers (or just work from ‘crib notes’ like ‘print money to stimulate economy’.)

    Once you start watching for that, you can spot it endlessly.

    So “Simpleton Keynesian Doctrine” is frequently in evidence in Senate and House debates during times of economic “issues”. Presidents will demand it. Even The Economist writes it up and demands it (so if any of their staffers read it, they get the same crib notes version). Keynes did NOT say to endlessly print money, period. Keynes did not say printing money always stimulates. Keynes did not say “print all you want, no worries.” (The Modern Monetary Theory folks did that: ) What Keynes DID say was that during times of economic recession, a government could print more money as a temporary measure and it would slow or reverse the downturn (make up for the decline in velocity of money with added government spending) BUT once the economy (and velocity) pick back up, the government must withdraw that excess spending and slow the run to the bubble.

    That last part is always forgotten in the crib notes, since it is unpleasant and politically unpopular.

    Think about this: IFF we’ve had about a 50% drop in V of money, we need to add about 50% more money into circulation via direct government spending to make up for that drop of V. Once the private economy is moving again, V will start to recover back to ‘normal’. At that point, we need to cut out that 50% of added direct government spending to prevent a massive inflation as V rockets up. ( VM = PQ so we jumped M way up when V shrank, now M has to drop when V rises to keep PQ constant and that is the goal “stable prices and economic output”.)

    But notice that does not say “give money to banks to sit on”. At some point Keynes was mutated into the notion that the banks, via lending, would be the path to economic stimulus and distribution of that money. And it works, too, if banks lend. Fed loosens money supply, banks have more to lend, money gets to businesses (who build and hire) and to consumers (who buy and consume). UNLESS the banks are not lending, the businesses are not borrowing (or not building and hiring) and the consumer is not getting any to use to buy and consume. Using this modified Keynesian mode fails when at the same time money is given to the banks, rules are put in place that prevent the desired follow on effects ( more lending, more spending). So it fails if the banks are being subject to new laws demanding higher reserves ratios, stress tests, etc. (they don’t lend more) and if fails of businesses are not willing to build and expand (laws demanding more ‘compliance’ spending instead and more money going to fees and fines like GM and AT&T and others being whacked by the government) and if none of it reaches the consumer (or they get, say $1000 and find that they now have a $2000 ‘medical insurance’ bill in the envelope too).

    But ask a politician about those details. Ask the business community. Each focuses on some detail, never on the whole, and rarely is Keynes mentioned at all (or only the crib notes version as defense). So the same folks pushing Crib Keynes stimulus forever; pass laws that prevent it from working.

    Now notice that it does NOT say “give money to Friends Of Government” nor does it say “Do Stimulus without end”. Rich connected folks fattening their bank accounts does not provide money to consumers to increase consumption. Once (if?) V starts to rise, failure to withdraw that excess government spending results in a very rapid and very large inflation ( as V goes up 50% then prices have to rise 50% or total economic activity rise 50% – and usually you can’t get that much increase in Q…) All those details are lost in the process too…

    So, IMHO, it is not so much that TPTB are aware of all this and so greedy as to want to grab all the money anyway; nor are they so evil and crafty as to have figure it out. They simply believe in Crib Keynes (stimulus is good and has no downsides nor limits) and Modern Money Theory (it really has no limits on it… so do all you want) and think they can do good with it (AND fill their pockets at the same time ‘win-win’…) It is a subtle form of Stupid-with-Greed.

    So, IMHO, Keynesian Stimulus is a wonderful tool, IF used in accordance with the full, complete and original understandings and limits from Keynes. But if MMT is believed by TPTB, and it is used as Crib Keynes; the end result is a backing into the Stagflation vs Deflation corner….. You end up with no economic improvement from added ‘stimulus’ while at the same time V continues to drop. At most you can keep prices stable with economic malaise. (Though I’d predict that, too, eventually runs dry and you fail into either deflation or inflationary recession. Can’t sit on the knife edge forever…)

    In the case of the USA, IMHO, the problem is that the Keynesian “stimulus” per person (or per company) is far less than the added burdens of “progressive programs” and “compliance costs” and generalized taxes (and military adventures…) so the end result is NOT stimulus. Just a person being bled to death and given cups of strong coffee to make up the blood volume….

    Maybe a bit more after breakfast ;-)

  45. Jason Calley says:

    Hey E.M.! While I agree with pretty much all you say in your comment at 10:00am, there are a couple of factors I would like to add, if I may.

    Under the present system of central banking, the accepted mechanism of monetary injection is that of lowering interest rates. Money becomes cheap, so more businesses, individuals and entrepreneurs stick their head out, get a loan and spend the money into circulation. However, when interest rates are artificially lowered, one side effect is that the productive part of society no longer has an incentive to save. Why pump money into a savings account when you get an effective interest rate of less than zero? Why not spend it now and save when the numbers are more in your favor? This is, of course, partially offset by the fact that the central bank is creating cheap money, but there is one big difference. The central bank creates money ex nihilo; not so with individuals. Individuals create savings by producing something valuable in the marketplace and then consuming less than they create. It is that excess production which is the actual capital used by businesses when they expand, or by consumers when they consume. The loan (the pieces of paper or the numbers in the computer) are just a claim ticket to wealth, while the excess production from people saving is actual wealth. That actual wealth is what businesses attempt to put to productive use. Individual savers produce excess wealth; fiat monetary creation just bids up the price of existing wealth.

    Second, there is a reason why the bankers are sitting on the new money. The Federal Reserve is still paying interest on excess deposits. As you know, each bank is required to keep a minimum deposit at the Fed — but today, most banks keep more than the minimum and are earning interest on not just the minimum, but on the excess as well. A low interest from the Fed is a much safer investment than a potentially higher interest if that same money were loaned out to businesses. If the Fed really wanted that excess money to go to Main Street, it could simply tell the banks, “excess reserves will no longer receive interest. In fact, we will charge you 1% per year for any excess deposits you keep with us.” Why does the Fed not do this? In my opinion (and I may be wrong) the Fed realizes that REAL consumer price inflation is already at 10% or so, and if all that new, hot money goes into general circulation it will quickly jump start a round of MUCH higher inflation, an increase so big that even our professional liars will no longer be able to convince hoi poloi that “everything is under control!”

  46. philjourdan says:

    First, a reminder: “Never attribute to malice that which is adequately explained by stupidity.”

    I will add a corollary “Actions done out of gross ignorance are indistinguishable from those done with malevolent intent”.

  47. jeremyp99 says:

    E.M.Smith says:
    29 October 2014 at 10:00 am

    First, a reminder: “Never attribute to malice that which is adequately explained by stupidity.” While there are some very crafty AND very evil folks in the world, and their malice does account for much that is evil; IMHO it is the stupid that burns most brightly.

    Witness, on BBC Radio 5, one Sally Uren, Chief Executive at Forum for the Future with overall responsibility for delivering our mission to create a sustainable future. Sally says this, when taxed about the fact that wind is not always available.

    “…that’s not a worry when we’re thinking about security of supply from renewables because we have these things called “storage units” and so we have this grid that allows us to store energy and deal with peaks and troughs in demand and so this notion that when the sun stops shining and the wind stops blowing so does our energy, it’s just not true.”

    God help us.

  48. E.M.Smith says:


    Good points. I would only add a footnote on the earner-savings vs fiat-deposits: Yes, it is a decent proxy for ‘real wealth creation’ vs ‘paper chase’… but even the consumer savings have a small ‘inlated into being’ component (that gets very complicated very quickly… depending on who gained what money from which inflated price…. so if my wages inflate and my mortgage doesn’t, some of my ‘savings’ is just redirected housing value…)

    As per bankers sitting on the money: There is an added point. The Fed mandates the reserves size and quality required. Globally where was a giant push to more reserves and higher quality reserves (stress-tests and all) post 2008. To some extent, the ‘sit on your assets’ is a mandate. (They also added intrest payments then and a bit more). In essence, instead of the banks having no real assets in reserves (phony mortgage value), they now have bales of fiat money in reserves… that if actually released would lose value in trade via massive inflation… Not really seeing the difference in the world of actual production and consumption, though…

    @R. de Haan:

    I’d been planing a posting on that BRICS say ‘up yours’ to Uncle Sam… not sure I need to now. They are also setting up their own Internet Backbone that does not have NSA buggerage in it… Money, oil trade, internet, and more. All being pulled away from USA control / inspection / intrusion.

  49. Larry Ledwick says:

    A third corollary: The actions of a large number of individuals with similar interests and similar objectives are indistinguishable from an intentional conspiracy.

    The point being it is easy to see a conspiracy based on circumstantial evidence when none actually exists.
    Reasonably intelligent people in similar situations will independently come to very similar conclusions about how to beat the system or abuse loopholes.

    Large organizations act like a living organism they have a persistent impulse to grow and gain power and protect their survival. This is driven by the individual impulses of the people in the organization doing the things that do the same for themselves individually. Department heads always try to increase their head count and their budget and gain influence in the organization. If they have a malicious personal agenda the whole organization over time takes on the same agenda because of self selection. People who feel comfortable in that program agenda tend to stay and reinforce it and those who feel uncomfortable with that agenda tend to leave or get pushed out since they don’t “fit in” or are not “team players”.

    The current banking and regulation system is the result of about a century of such mission creep in the financial industry and the regulation system.

  50. Power Grab says:

    I’d like to propose a poll. For your typical, garden variety banker, would you say he or she is more likely to be (1) stuck-in-stupid-rut mindlessly following orders of TPTB . . . or (5) maliciously intent on solidifying their position on the top of the money hill . . . or somewhere in between?
    (1) – – – (2) – – – (3) – – – (4) – – – (5)

  51. R. de Haan says:

    Power Grab says:
    29 October 2014 at 9:32 pm

    I’d like to propose a poll. For your typical, garden variety banker, would you say he or she is more likely to be (1) stuck-in-stupid-rut mindlessly following orders of TPTB . . . or (5) maliciously intent on solidifying their position on the top of the money hill . . . or somewhere in between?
    (1) – – – (2) – – – (3) – – – (4) – – – (5)”

    Where I live your typical garden variety banker is no longer available anymore.
    Just like the typical garden variety services.

  52. Larry Ledwick says:

    I think you have to realize that TPTB that most impact management are the local banking regulators and the stock holders / investors in the banking institution. The first can put them in jail the second can file a lawsuit for failure to fulfill their fiduciary duty to maximize profits and returns on investments. Those are the puppet masters.

    It the senior executive officer has a good sales pitch and can keep the investors happy and scam the regulators then and only then can he line his pockets to excess. Excessive compensation for example has to be permitted by the board of directors and senior management and allowed by majority of the investors and at least with a wink and a nod from the regulators.

    It takes a culture of corruption for the really obscene stuff to occur. Unfortunately in cases like Lincoln trust, Continental Illinois National Bank and Trust, Oklahoma City’s Penn Square Bank and others as well as major corporations like Enron that worked to skim the system it appears too many in a position to stop such corruption in banking, finance and corporate America, are willing to at least tolerate or turn a blind eye to it or take their share of the graft to keep quiet.

    If you want an interesting read on the Fed you might want to pickup:
    “Secrets of the Temple” a blow by blow discription of the lead up to the hyper inflation of the period that led to Volkers hard full stop on the economy to wring inflation out of it. The good news is that the Fed has a lot of impact on the economy, the bad news is they don’t have a clue what they are doing since the information they base their decisions on is always out of date. Not a problem when things are stable but under rapidly changing conditions it leads to run away oscillation of the economy.
    David Stockman’s book “The Great Deformation” goes into some of the smoke and mirrors accounting in our financial system. Another book that goes into some of this is “Who Will Tell The People: The Betrayal Of American Democracy” by William Greider or The Continental affair: The rise and fall of the Continental Illinois Bank James P McCollom.

    After going through those books you will see the endemic rot in our financial system. Too many fingers in the pie and too many houses of cards that need to be propped up to keep the system alive. Our economy is a confidence game. As long as most of the world believes America has a strong economy they can keep the music playing. When that perception changes and the music stops, lots of folks are find they don’t have a chair in this game of musical chairs.

  53. Jason Calley says:

    @ Larry Ledwick “After going through those books you will see the endemic rot in our financial system. ”

    That word “endemic” triggered a thought in me… bear with me for a moment.

    Why do we get old and die? Why is that? After two or three billion years of evolution, why didn’t life come up with a design where we live (and maybe reproduce!) pretty much indefinitely? Instead we get heart disease, auto-immune diseases and cancer. Cancer! Our own darn cells go wacky and end up killing us! What kind of evolution ordered that?! The answer is that many of the things that end up killing us are consequences of adaptations that helped us survive the first part of our life and actually make it into old age. When you live in a world of sabre tooth cats and potential infections for every cut, rapidly reproducing cells and sensitive immune systems are a plus. After all, even with all the help that such adaptations provide, you will almost certainly fall prey to something deadly before you reach 30 or 40 or 50 anyway. Even if you are perfect (biologically speaking) you will still get gobbled by a tiger or squashed by a mastodon if you live long enough. You will never reproduce indefinitely even if your biology were good enough to allow it. The fact that those same adaptations will kill you by age 80 is of no concern. Today, of course, we had made the world much safer — and today we last long enough that those very-much-needed adaptations begin to show their negative side, a side that we never had much chance to see when we were hunter gatherers.

    Now consider the fact that complicated organizations exhibit many of the same characteristics that individuals to. In fact, we often speak of complicated organizations as if they were, in fact, individuals. We talk about “the Federal Reserve” or even just “the Government” or “Walmart” as if they were people — and that really makes a certain amount of sense, because they often do seem to act in a sort of monolithic, wilful, way, the same as an individual might. (By the way, I am NOT saying that “corporations are people”, (they are NOT), but only that they act in similar ways). In a society without writing and with an economy that is essentially hand-to-mouth, complicated organizations are either short lived or maybe even impossible altogether. Today, our wealth and our abilities in technology (both engineering and information) have allowed us to maintain complicated organizations for decades and even centuries. I would posit that many of the same characteristics that made our long-lived and complicated organizations stable and effective for so long have slowly and over generations changed from being assets to being dangers. Our cultural and governmental systems, our fiscal systems have outlived their shelf life. For example, the ability to covertly gather information is a great boon to a country fighting for survival — but that same ability once it metastasises to spy on every email and phone call becomes a danger. Regulation of foods and drugs may very much increase public health — but when that same power aligns itself with pharmaceutical or agribiz interests may very well keep desirable innovations off the market. Setting standards of monetary units and coinage is an important boon to doing business — but when that authority is used to create legal tender laws and fiat currency, it endangers rational market transactions.

    Old age and infirmity comes to each of us. We are very complicated and (as the Buddha pointed out) nothing lasts forever. Things that helped us reach old age become the things that finally kill us. Maybe the same is true of all complicated systems.

  54. Richard Hill says:

    EM, I might have missed mention of this in the comments.
    This could be the trigger that will start the avalanche……/first-poll-shows-yes-side-has-upper-hand-ahead-of-s...
    Oct 22, 2014 – At the end of November, Swiss citizens will go to the polls to vote on three … or not the Swiss National Bank should increase its gold reserves to 20%, that the … 30 referendum was positive,

  55. Pingback: As The Money Tree Grows | Musings from the Chiefio

  56. R. de Haan says:

    philjourdan says:
    28 October 2014 at 6:04 pm

    @R. de Haan – You quoted me, then misquoted me.

    “Germans, while smarter than many others,”

    Smart is a subjective term. Smarter is objective. All you did is put up an argument that they are not smart. not that they are not “smarter”.

    I just wanted to point that out to you, as I do not want to detract from this article by getting into a debate about one ethnicity over another.”

    You are completely right of course.
    It wasn’t my intention to start a debate about enthnicy either, just pointing out that big mistakes from the past obviously have been forgotten.

  57. R. de Haan says:

    Jason Calley says:
    30 October 2014 at 3:30 am

    “Why do we get old and die? Why is that? After two or three billion years of evolution, why didn’t life come up with a design where we live (and maybe reproduce!) pretty much indefinitely?”

    Interesting remark that made me remember an article about this jelly fish.

  58. Jason Calley says:

    @ R. de Haan Interesting article! Thanks!

    I actually found a photo of a subject undergoing trail jelly-fish regeneration…

    Just kidding about the picture — but it really is a good article you linked to!


    I have read that when a caterpillar turns into a butterfly, it is not quite the transformation that Disney depicts. We think of a “caterpillar changing into a beautiful butterfly!” but what actually happens is a bit more disturbing. The caterpillar has within it a small group of cells; these cells are almost the same as a sort of “egg” inside the caterpillar. When the caterpillar pupates, the body of the caterpillar dissolves into a nutrient gloop, and the cells feed on the gloop while they grow to become the butterfly — much the same as a chicken egg has a yolk that feeds on the albumen as it grows. The caterpillar is not exactly transformed; perhaps more accurately, the caterpillar dies and the new insect-to-be feeds on the corpse. One could certainly imagine a sort of caterpillar/butterfly cycle where the butterfly also has a small group of cells, but a group that grows into a small caterpillar when the butterfly dies — and so on… Immortality without individuality!

    I guess it could happen if evolution keeps throwing dice. :)

  59. E.M.Smith says:

    @Jason & R. de Haan:

    We die because that is the way a long lived species can beat infections.

    Sex is how we ‘re-roll the genetic dice’ so that as the little buggers (who have a generation every few hours, some times every 30 minutes) evolve to beat our genetic systems and eventually master how to make us sick; so just when they get good at it, we die. And a very different genetic ‘mix’ in our children starts the race again.

    Were it not for that, they win the evolution race and we live a very long life until we are bug food and (if reproduction were asexual) our offspring (mini-me) would be consumed very quickly as the bugs ‘had his number’ from early on. We can’t evolve nearly fast enough ( 30 generations gives a maximal response to selective pressure. For people, that is about 900 years. For a bacteria or virus that can be 900 minutes … guess who wins that evolutionary race?). So we do a major genetic ‘reshuffle’ for each new individual and that beats the bugs. Most of the time….

    As much as I’d like to live “forever”, we need a better immune system or the species dies of a new plague…

  60. p.g.sharrow says:

    Elizabeth MacDonald/Emac at Fox business has a good article on business “Zombies” being kept alive by the present banking regime of super low interest rates.
    Businesses that are the dead walking because they can not generate enough profits to service their debt at any real rates. pg

  61. Power Grab says:

    @ R. de Haan and Larry Ledwick:

    Thank you for the feedback. I see that was a pretty useless poll. ;-)

    Now that I think about it, the cases of “former bankers” that I am aware of seem to be cases where decent folks no longer are in the business. Two people I have met face-to-face fit that pattern exactly. I also remember a third-party evaluation of the management change of a bank in a nearby small town. The pertinent comment about that change was, “That bank will never be the same.” Now I’m wondering about all those dead bankers that I kept seeing news stories about this year. Were they likely to be the few decent or semi-decent people who had to be gotten rid of so nefarious plans could continue to be fulfilled?

  62. E.M.Smith says:


    I didn’t answer the poll as it was both a bit ambiguous as to ‘what is a banker’ and had an axis orthogonal to my experience. That is, the choice is for a particular banker to be drone or master. The reality, IMHO, is that most “bankers” (local branch Vice Presidents) are drones to the organization. The regional and even head office bankers might also be “drones” (depending on ‘family’ and stock holdings). The real PTB are way removed from day to day banking, and they are masters. Yet some are active ‘in the business’…

    FWIW, as an Econ major, one of the major career paths is “banking”. I could easily have been a “banker”. Either a retail bank VP (i.e. senior clerk…) or potentially an “investment banker” (back during Glass Steagall days when there was a difference…) or even as a Government Lackey at something like The Fed. In fact, I’ve been security cleared (long ago) and worked a contract at The Federal Reserve in San Francisco. Each one of those is dramatically different from the other.

    Retail, you are a Chief Clerk there to manage the Clerks and assure the books balance and take the blame if anything goes wrong, you get robbed, whatever. You get a nice V.P. title and maybe even a company car (at big banks), and a paycheck slightly larger than the other Clerks…. ALL decisions are made regionally or above, other than the decision to loan, or not loan, to the locals (that is based on the guidelines / decision grid issued to you anyway…) Drone with a suit. And a title. ( I decided to make my own company and have a meaningless President title rather than have a meaningless V.P. title at a bank…)

    Investment Banker. The job is basically Fast Money Eddy and Sales Lube Applicator. Convince folks you are honest, moral, prudent, and wise. Then take their money to the craps table, leverage it like crazy, and cream off a few percent on each roll… (Major skill is to be good at recruiting more folks to give you their money to ‘protect’ and ‘invest’…) I decided to only roll the dice on my own money… Oh, and you do get to take exams from the Government to get a license to do this…

    Government: Here you are either “Lackey to the guy with Family and Money connections” who was put in the power position to make sure the right things work for the right people, or you are born to their job. Very occasionally, someone who licks the boots really really well gets recognized as having potential and gets the power position. Helps to have gone to the Right School and partied with The Right People. (As I didn’t, and went to an Ag school not connected to The East, this was not really an option for me.)

    So how does that POV fit your poll? Thus my non-answer….

    FWIW, I’d happily be either “Lackey to The Guy” or be in “The Power Position”, and I’d even deliver to my Patron the services they directed. I’m not stupid. And I believe that “A contract is to be honored”. BUT, those folks don’t appreciate someone who “talks dirt” about their way of life, and resents the abuse of the Regular Joe and Jane. They are always just a bit worried that you will go ‘off the plantation’, so they don’t think they can trust you to suck up 100% and ‘do what needs doing regardless’. Oddly, my Mother’s maiden name was “Sumner”. That is from “Summoner”. The Lackey who hauled your ass before the Royal Court. Big and Smart enough to beat / catch the folks who did not please the Crown. Polite / political enough to Suck Up To The Crown 100%. Willing to be paid for it… So I have “the right stuff”… but just not recognized by the American PTB types, who get worried by my Populist belief system ;-) (Or maybe my love of guns and liberty… ) Short form: “It’s complicated” ;-)

    So I’m cast into a life of not-quite-poverty as champion of the masses … The market for Lackey To The Crown being a bit thin in Florida ;-)

    I really don’t know what it is, but I DO feel compelled to honor trust. It doesn’t really matter to me if my contract was with The Fed, or the local Dope Dealer, or The Crown, or some random company, or whatever. Once I’ve pledged privacy and fealty, it’s done. Nobody gets a peak at your email and nobody buys out the contract. I think it is some holdover from the few hundreds (thousands?) of years as Lackey To The Crown… On the spouse’s side, her grandmother was nanny to the Royal Court of Belgium (even snuck the Royal Kids out of the place just before the Nazis invaded… Yup, Granny was in a small boat with a couple of Royals Kids under her coat crossing the channel… ) So my kids have it from both sides.

    Strange thing is, it’s inherent. Not a value judgement. Not negotiable. I’d have the same “need” to be honorable if I was doing maintenance on a Colombian Cartel server (with full root access) as I felt when I had 100% visibility into email at several companies and never ‘looked’. Someone gives me a trust, I must respond in kind.

    So, had I become a “Banker”, where would I have been? What bucket would I put me in? And what bucket is right for the others that did take the job? Hard to say…

  63. p.g.sharrow says:

    Honor is it’s own reward pg

  64. M Simon says:

    Simon’s Law
    It is unwise to attribute to malice alone that which can be attributed to malice and stupidity.

  65. M Simon says:

    Cancer! Our own darn cells go wacky and end up killing us!

    It doesn’t have to be.

    So every time you see a TV story about some “poor cancer victim” remember. It doesn’t have to be. At this point cancer is a scam. Because we know how the body fights it naturally and we know how to augment that fight.

    That is what I was talking about up thread when I said that fully exploited endocannabinoid medicine could reduce medical expenditure by 1/4 to 3/4. But that means bankrupting the medical establishment.

  66. M Simon says:

    As much as I’d like to live “forever”, we need a better immune system or the species dies of a new plague…

    Too funny. Look up “endocannabinoid immune system”.

    Now let us look at Ebola (for instance). It kills by cytokine storm. Now look up “cannabis cytokine”.

    You are in fact wishing for what we already have at hand. If it wasn’t illegal.

  67. p.g.sharrow says:

    @M.Simon; someday we should discuses this in greater detail else where, but not by plugging up Mr. Smith’s threads. ;-) pg

  68. E.M.Smith says:


    I think of it as this: It is MY honor, be they saint or crook. What they are does not change my nature, nor my honor code.

    @M. Simon:

    Please reread what I said. Make our immune system better, we can live a small amount longer, BUT, we are still in The Red Queen’s Race with the bugs. Sex is the strategy that beats their much faster evolutionary speed. Smoke all you want, those bugs will still find a way to beat it.

    Oh, and if you and P.G. want a thread to discuss this at length, I’m happy to make one for y’all… I find it a tiny bit interesting, but just not a major focus (see comment on the other thread where this broke out…)

  69. p.g.sharrow says:

    E.M.Smith says:
    31 October 2014 at 9:22 pm An interesting essay about being IN SERVICE to important people, rather then being OF SERVICE to others.
    “So I’m cast into a life of not-quite-poverty as champion of the masses … ” EMSmith
    Being a “prince of the people” has it’s own rewards. The goodwill of people all over the world is a priceless thing. pg

  70. Pouncer says:

    “What Keynes DID say was that during times of economic recession, a government could print more money as a temporary measure and it would slow or reverse the downturn (make up for the decline in velocity of money with added government spending) BUT once the economy (and velocity) pick back up, the government must withdraw that excess spending and slow the run to the bubble.”

    Keynes avoided charges of plagiarism by inverting the order. In earlier, and as far as I know original, economic work the publication “Genesis” offers advice on the business cycles from economic success and high velocity — the “fat years” — followed by a similar period of downturn — a.k.a. “lean years”. The difficulty then, now, and always remains finding one or more advisors who can correctly and honestly assess whether or not the current times are “fat” or “lean” and what portion of the economy can be claimed without destroying the whole thing. Genesis (the authors of which rounded the value of “pi” to “3”) argued the governments share’ could approach about 20%, while the US historical average Keynes studied never successfully rises much above 18%. Pretty close, I suppose.

    “Joseph recommended that Pharaoh set over Egypt a man discreet and wise, that he appoint overseers to take up a fifth of the harvests during the years of plenty, and that he store that food for the years of famine. Pharaoh agreed, questioning whether anyone could find a man such as Joseph in whom the spirit of God was.”

    The boss _always_ needs a “Lackey to The Guy” in “The Power Position”, who’d even deliver to the Patron the services they directed. (and is not stupid.)

  71. p.g.sharrow says:

    Tough to find a “Lackey” that will tell the bossman what he needs to know rather then what he wants to hear. pg

  72. Jason Calley says:

    @ p.g.sharrow “the US historical average Keynes studied never successfully rises much above 18%.”

    Is that Federal budget compared to GDP? Or average tax paid? Feds only, or state and local as well? Income taxes only or all taxes? Sorry to have so many questions, but if my total tax load were only 18%, or 20%, I think I would dance in the streets. I think that the average (working) person today pays MUCH higher than 18%.

    “Tough to find a “Lackey” that will tell the bossman what he needs to know rather then what he wants to hear. ”

    Tough to find a boss who wants what he needs instead of what he wants to hear.

  73. Larry Ledwick says:

    @Jason Calley

    I think that the average (working) person today pays MUCH higher than 18%.

    Depending on how you account things, more like 30% -35% or more depending on where you live and your life style and income range.
    Typical middle income federal tax rate about 18% more or less
    State income tax about 4.63% here in Colorado
    Local sales taxes 6%-7% more or less
    special purpose taxes and taxes disguised as fees (gasoline tax, car registrations, sewer fees, water fees, communications fees for phones etc.)

    Tally all those up for our individual case and the sum total is scary. Since almost every thing you spend ends up being taxed at the sales tax rate, you can basically take your net take home pay, subtract what you spend on gasoline and that amount is taxed at your local sales tax rate. The gasoline of course is much higher. Here in Colorado fuel tax on gasoline is 40.4 cents a gallon on $3.00/gallon gasoline or 13.4% — I drive 15,000 miles a year at about 20 mpg over all average or 750 gallons of gasoline $2250 a year. At 13.4% that is $301.50 a year on gasoline.
    Local sales taxes are between 7% and 8% where I usually shop,

    It all adds up fast if you tally it all up since in almost all these cases the money is taxed 2x. You pay 23% or so (state + federal) at the time you are paid then when you spend what is left it you get dinged again for anywhere from 7-14% depending on what you are spending it on.
    Net is 30%-35% for most folks who are not using tax reduction activities like interest free bonds or some deferred taxing as in 401K accounts.

    Obviously all these numbers vary from individual to individual but ball park would be typical for a lot of people in middle income groups without major tax deductions. Some people simply cannot qualify for deductions because of their situation and get left out in the cold as far as all the big ticket deductions some others can claim like mortgage interest etc.

  74. Jason Calley says:

    Hey Larry! Don’t forget Medicare and Social Security (twice! Once for you and once for the part that never makes it into your paycheck because it is ostensibly from your employer). And inflation ought to be included as a tax; Bernanke said it is a tax: http://www(dot)youtube(dot)com/watch?v=ELUtbDP0RvY If you include those in the mix, my guess is that the average Joe (or Larry or Jason) pays the majority of his earned income toward some type of tax or another.

  75. Larry Ledwick says:

    Good catch!
    Yes SS payments bump it up towards 40%-50%. Also increases in insurance costs over what you should be paying due to Obama Care “tax” — Seriously as a single male near retirement age I don’t think I need pregnancy coverage or birth control coverage.

  76. E.M.Smith says:

    I did that calculation some time back. IIRC it was ‘dancing with 50%’ for both Federal and State when some of the ‘also ran’ taxes were included (for California, where I lived then). That was based on actual budgets as % of GDP rather than tax rates, so is more accurate. Did not include inflation (but ought to have…)

    Now an interesting statistic I heard once, but have not found the reference… something along the lines of “No government ever lasts long after the taxes exceed 50%.” Seems that at the time folks figure out they are the losers and only folks in Goverment are winning, they all put down their tools and either climb on the Gov Gravy Train, or just sit and do nothing. (Or, more likely, just “do for themselves with what they have” as the money economy grinds to halt…)

    We in the USA are over that line in the high tax States, and close to it in the others.

    For California, nominal rates (assuing you have a job that can afford a house payment or appartment in the S.F. Bay Area where I was) were about: Fed: 38%, State 11% income, 9.5-10.5% Sales, plus property tax. SS et. al. about 6% to 12% depending on how you figure it. Total? 64.5% to 71.5% Then you get to (hopefully) find a way to get some deductions scraped together to get that down to about 1/2 … (IFF you can find a way to live outside the SF Bay Area, housing can be cheaper and so you don’t need to be in the absolute top tier of taxes just to have a 1000 sq ft 50+ year old shoebox in a mediocre neighborhood… so you might be at 40% to 50% tax rate already… Then again, Stockton is one of the highest murder rates in the nation and your commute to work is 2 hours, each way… Not hypotheticals, BTW, and no tag for humor…)

    California is already over the line of implosion and shows it. Various estimates between $15 and $40 Billion of unserviceable debt load and shrinking economic base. Detroit is their model… Oh, and a few cities and counties have already filed bankruptcy – so again, not a hypothetical. Their answer? A $10 Billion dollar proposal to put a river into a tunnel underground to ship it to Los Angeles (at the same time EPA demands the water be left in the bay for the bait fish smelt…) and another $10 to $20 Billion “Train To Nowhere” to “connect” the L.A. area to the S.F. area… except it doesn’t connect to either one, you take a bus a few hours at each end, and nobody in California will take the bus, or that train.

    And that, boys and girls, is why I’m now watching California “from afar”…

  77. Jason Calley says:

    Hey E.M. Your comment about “A $10 Billion dollar proposal to put a river into a tunnel underground to ship it to Los Angeles (at the same time EPA demands the water be left in the bay for the bait fish smelt…)” got me curious so I googled a little. The first article I found says that they now want two tunnels with a $25 billion price tag. GACK! That is a huge amount of money. I wonder how closely the possibility of desalination was considered. I know that current desalination is energy intensive, but the amount of energy needed is dropping by using thinner graphene reinforced membranes as well as scavenging the high pressure from the outgoing water to facilitate pressurizing the incoming water. There is also the possibility of “mining” other minerals out of the waste return stream is worth investigating too. Of course I am sure that someone would complain that we were sucking the Pacific Ocean dry. Maybe if the plan were presented as a way to prevent “catastrophic sea level rise” it would get some CAGW funding!

  78. Larry Ledwick says:

    This just popped up on my twitter feed:
    Currency trading probe for JP Morgan Chase

  79. p.g.sharrow says:

    @EMSmith; Yeah you chickened out and ran off to Florida! You keep telling everyone that Florida is much nicer then California and maybe the Liberal Progressive Ecoloons will follow you and we real Californians can repair our Republic. ;-) pg

  80. Jason Calley says:

    @ p.g.sharrow “maybe the Liberal Progressive Ecoloons will follow you”

    Boll weevils always go to the biggest cotton fields… Maybe more importantly, parasites always reproduce faster in prosperous areas. Less prosperous cultures cannot suffer fools to promote their idiocy.

  81. p.g.sharrow says:

    @Jason Calley; You are so right! I had several varieties of the same crop in my garden and the sweetest, fattest one got all the bug damage! Lol :-) Good thing I spread the risk.
    It will take some time to repair California. It took a hundred years for my Anglo Ancestors to make the Central Vally Garden of Eden and only a generation for the EcoLoons to ruin it. Likely take 50 years to repair the physical and financial damage, IF, we can get them to move to Florida and Texas! One can dream. pg

  82. Jason Calley says:

    @ p.g.sharrow “IF, we can get them to move to Florida and Texas!”

    I wouldn’t wish that on either state. Maybe convince them to go to Wyoming (my apologies to the fine people of Wyoming!). Once they get settled in, pray for a rapid, spontaneous disassembly of the Yellowstone caldera.

  83. E.M.Smith says:

    @Jason Calley:

    California has a couple of desal plants. They make the most economic sense. Hard to get permitted in California, but the best solution.

    But this isn’t about water…. Gov. Moonbeam is the baby boy of Gov. Brown (senior) who gave us the California Aqueduct and made the present So. Calif. possible. It is about a ‘legacy’ for Moonbeam like his daddy…


    Yeah… they forgot to tip off the congress critters for their cut prior to running the operation…


    I like Florida more, but it has its issues. Hard to grow a garden. (Or I’m not used to what to do yet). Summer heat and UV just cooks plants in the sand. Massive rain washes away the non-sand parts of the soil, so hard to build it up well. Winter seems to work better (ought to have taken my clue from the local city named “Winter Garden” ;-) Bugs! My God man do they have bugs (compared to California where there are damn few as the dry kills them off.) Haven’t had a Tropical Storm yet, but I’m sure it will adjust my attitude 8=}

    @Both Of You:

    no, No, NO, NO! Convince them to move to Chicago, New York City, and Detroit (to reclaim it for Gaia or some such). Off the land and into “urban homesteading” to save the planet… Rack ’em, pack ’em, and stack ’em in 100 story skyscrapers in physically concentrated (i.e. few) urban areas… Do Not under any circumstances send them to semi-rural areas to dominate the local cities and shift the whole State political complexion…. Just a FEW places, already of that mindset, where they are not going to add to the damage… (And while you are at it, ship them out of Colorado and New Mexico so they can return to the States I remember…)

  84. Graeme No.3 says:

    something along the lines of “No government ever lasts long after the taxes exceed 50%”
    Possibly from C. Northcote Parkinson – The Law and the Profits. Published 1959.

    A somewhat tongue in cheek look at public finance. He points out that as the rate of tax rises from 20% so the incentive to “bypass the tax system” rises (as the Black Economy). This causes more government regulation = more bureaucrats = more expense = more taxes = more Black Economy, leading to stagnation and a collapse in respect for the government, and eventually to revolution or collapse.

    He set the limit around 36% government take (of the real economy, i.e. official figure + black side). [The black side would included “special exemptions” for favoured groups e.g. tax free allowances for politicians etc.] This works out around the 50% mark though he never quantified that mark. I spent a little time in Sweden in the late seventies and the black economy was well and truly established. e.g. in one city there were no taxis but you rang up and a ‘hire car’ would be available [24 hours]. The drivers were all employed at the local tax office and ‘moon-lighting’ [including using the tax office number]. For obvious reason no-one dared compete.

    He based his work on historical evidence and seems to have underestimated the stoicism of the modern population, as Sweden and the UK both ran above that level for years, with stagnating economies, although eventually voting out the established types for someone willing to cut the burden (e.g. Margaret Thatcher). I do note that at the recent elections to the European Parliament 25% didn’t vote for any of the main stream parties, so there is some disenchantment showing in the EU.

  85. M Simon says:

    What the NIH says: Further research and especially, clinical trials will further demonstrate the usefulness of medical cannabis. As legal barriers fall and scientific bias fades this will become more apparent.

    Notice the bit about “scientific bias” heh. I believe I was making that point. Links to that statement and other NIH links at:

    We use plant medicine ALL the time for deficiency diseases. Vitamin C. And we have learned that the whole plant is more efficacious than a pill. Although the pill can be a booster.

    Followup in: -E.M.Smith

  86. Jason Calley says:

    A brief article with ideas about simultaneous inflation/deflation. Basically, if you systematically bleed one part of a society to enrich a different part, one side deflates, the other inflates.

  87. E.M.Smith says:

    @Jason Calley:

    Interesting idea. Related to the idea of “inferior goods”. That doesn’t mean their quality is bad, it means that when you get more money, you buy less, and when you get less money, you buy more:

    So compare beef to potatoes. When rich, it is a steak with a bit of mashed on the side. When poor, it is a large baker with beef nowhere to be seen…. Poor folks buy a lot of potatoes. Rich folks not so much.

    So that theory is that if the poor folks are being bled, there will be potato inflation along with wage deflation (in effect). Kind of like what we’ve seen in the grocery store lately…

    Might be interesting to plot the relative prices and volumes of some sets of things to look for the effect. For example:

    Bus pass sales vs Ford Fiesta vs Tesla / Mercedes / Rolls
    Potatoes vs hot dogs vs chicken vs steak vs Rack of Lamb
    Walmart phone vs Sprint / Samsung vs Verizon / iPhone
    etc. etc.

    I know I’m solidly in the “used cars only” market, buying more potatoes (and No rack of lamb, at best the cheep shoulder blade chops) and way out of the iPhone market (looking at a WallyWorld phone… to replace my very old ‘flip phone’…)

    And I am very far removed from (above) the minimum wage earners for income and assets… just not in the ‘rich’ group (for 1% ers, I’m not even in the 10%-ers… but that is still way above the 80 percentile poor…)


    @Graham No. 3:

    Thanks for the pointer. I’ll have to look him up.

  88. Larry Ledwick says:

    Interesting observation about inferior goods, I think a good example of how screwed up Washington is regarding the economy, is the Cash for Clunkers program ™ where during a time of tight money they intentionally destroyed the cheaper cars which would have been the inferior good and tried to force people into new cars. The result is a lot of people bought more car than they could really afford because they were dazzled by the short term economics of the rebates, and simultaneously the folks that really needed to move down to the cheap transportation cars — the most vulnerable in the economy, were crushed as affordable “it runs” cars were artificially culled out of the market. As a result, all used car prices went up across the board, as everyone was forced to buy cars that were one grade better/more expensive than they really wanted because the lower grade cars were now a premium commodity and in short supply.

    This is also a short coming of “national inflation numbers” although nation wide prices may not be moving too much, locally other forces can cause significant inflation in the local market that if balanced by a local surplus some where else are invisible in the national numbers. You might have sky high gas prices in California due to their blending requirements and really cheap gasoline in Houston due to the proximity of the refineries. When buried in the national numbers the imbalance disappears but that does not help the folks hanging on by their financial finger nails in California trying to get the gas to get to work. High gasoline prices have relatively little effect on the core city urban poor who have rapid transit available and live close to all the places they need to go, while the same situation can force bankruptcy in the Mountain West where some folks need to drive 60 -100 miles a day to get to work. (my current job is 40 miles a day, although I have had to drive 170 miles a day) This is especially true for folks like construction workers who will work at multiple different job sites each year and can’t move close to their work site because it keeps changing. Worse in hard times you have to go farther from home to find work as the number of available jobs diminishes.

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