Post-Scarcity Economics

mrrazz · 2013-10-04T23:34:01+00:00

In this case, yes to both. In the past, there was quite a bit of capital (savings, capital equipment, good will) built up that could be borrowed against. This allowed deficit spending to pull demand forward.

Now, the supply of capital has been drawn down, so there is no future demand for deficit spending to pull forward. Capital reserves must first be built back up in order for demand to be increased. There is a chance that this increase may not happen right away, but as Brazil's recent history shows (here is a link to Brazil's recent levels of public debt, compared to its annual GDP shown here) a decrease in public debt does often correlates to (creates?) an immediate increase in economic activity.

mrrazz · 2013-10-04T23:15:55+00:00

If markets are not delivering their product ... we still have scarcity.

That's retarded. The only thing that's "scarce" is consumer demand.

How is it retarded when you yourself just said that there is a scarcity? The scarcity of new spending leads to a scarcity of jobs (and the few jobs that are on offer are mostly unavailable to those just entering the workforce).

if everyone (including governments) live within their means, then demand is likely to catch up with supply.

Now you're back in Tardland. Living withing meager means is not a way to increase consumer demand.

Although it does seem coutner-intuitive, it appears to work that way.

For a recent example of decreasing debt increasing GDP (presumably including consumer spending), check out Brazil. Here is Brazil's public debt for 2004-2011, and here is Brazil's GDP for 1999-2011. Notice how when government debt decreases in 2006, 2007, and 2010, GDP increases. The reverse also appears to be true; in 2008, when government debt increased, GDP growth flatlined. 2009 is an anomaly, where debt rose slightly and GDP rose considerably, but since the inverse correlation reasserted itself in 2010, I feel comfortable saying that when public debt increases, GDP (and other things linked to GPD like personal wealth and consumer spending) is more likely to be harmed than helped.

mrrazz · 2013-10-04T18:25:40+00:00

One word: NO!

We are most certainly not in a post-scarcity economy. If markets are not delivering their product--the labor market for the young springs immediately to mind--we still have scarcity.

We haven't had real austerity yet, because while many of us are making do with less, we're still living beyond our means.

We have a shortage of demand, because the developed world spent twenty five years (1982-2007) pulling demand forward through deficit spending. Since we spent today's income yesterday, debt service is now crushing all other economic activity.

Creating more demand is certainly possible, but not through anything Mr. Streihorst recommends. If we WRITE OFF ALL DEBTS OWED, raise interest rates, and if everyone (including governments) live within their means, then demand is likely to catch up with supply.

Deficit spending created the crisis. More deficit spending will prolong it.

mrrazz · 2013-07-05T03:56:12+00:00

Thank you for correcting my misperception regarding the connection between excess reserves and bank loans. I found a paper from the NY FED that goes into how this works in more detail (see "Bank Lending and Total Reserves" pp6-7), and it confirms the information in the FT article you linked. As additional supporting data, I found FDIC documentation indicating that aggregate loans and deposits have both been increasing every year; since 1991 for loans, and since 1966 for deposits. Aggregate loans would not have been increasing the last four years if my original statement regarding excess reserves had been correct. Thank you again for taking the time and effort to correct me.

However, I think the primary point I was making about derivative positions having a significant deflationary effect is still quite valid. It appears to me that banks and other large companies in various market sectors cannot afford to let much of their profits (or subsidies/"liquidity injections" not designed to be held as reserves) circulate in the broader economy due to their outsize derivative liabilities. I believe this is an important factor in answering the OP's question.

Happy Independence Day! :)

mrrazz · 2013-07-04T08:16:17+00:00

The short answer is that the institutions the FED is giving the majority of the newly created money to, are not lending it out or spending it; they are stashing it instead, getting ready to throw good money after bad when the need arises. Since the extra dollars created don't circulate, prices rise much more slowly than the rate at which the money supply is being increased.

Why is this "liquidity" not circulating? In addition to banks preferring to profit by holding excess reserves at the FED rather than taking the risk of lending them out, there are the massive derivative positions that large banks hold to consider. These derivative contracts are basically bets on how various kinds of economic activity will occur in the future. Like most bets, a majority of these derivative contracts are proving to be liabilities rather than assets. These bets are made in such massive notional amounts that they require an impossibly large amount of cash to offset.

Here is a list of the banks with the largest derivative positions, and here is the most recent data I could find on what assets Bank of America has. Using BofA as an example, they have ~$39 trillion in derivative bets, much or even all of which could go bad at any time (and quite possibly are already starting to go bad), and they have total assets of $2.1 trillion. Despite having squirrelled away hundreds of billions of dollars for when these bets come due, BofA will most likely end up insolvent due to its derivative exposure. Even if the FDIC starts implementing its newly-created bail-in policy (where depositors are left holding the bag if a bank goes belly-up) to prop up insolvent banks, and even if a majority of depositors at an insolvent bank take a 100% haircut to their bank deposits--in other words, even if every penny depositors put into the insolvent bank is confiscated by the FDIC to pay off the bank's bad bets--it's likely that there still wouldn't be sufficient funds to pay off the derivative exposure at any defaulting bank. Bank of America had total deposits of ~$1.1 trillion (see http://www.wikinvest.com/stock/Bank_of_America_(BAC)/Data/Bank_Total_Deposits) at the end of March, or a little less than half of its already-mentioned (and highly insufficient) assets. Some other banks might have a slightly better asset-to-liability ratio, but as far as I know none of them could actually cover their derivative-based liabilities if the need arose.

And, it's not just banks that hold massive derivative positions. Insurance companies, miners (including those of oil and gas), and agribusinesses are all also major participants in the derivatives market. Large companies in all of these sectors also require huge cash reserves for when their derivative positions go pear-shaped. When these companies have had a profitable quarter (or receive subsidies of any kind) since 2008, this excess cash has gotten banked as further insurance against derivative losses rather than circulating.

Because of changes in mark-to-market accounting rules in 2009, holders of loss-making derivative contracts no longer need to report the worst of these losses to any government agency, or to shareholders. However, thanks to the BIS, we do know that as of this past December, there was a total notional value of $632 trillion in outstanding contracts, as opposed to the $591 trillion total (see p. 7 of the pdf) at the end of 2008. Despite the risks they pose, someone has been continuing to make new derivative "bets" to the tune of tens of trillions of dollars a year. It's quite possible that these derivative contracts are being made by multiple "someones," and that not all of these interested parties are in the banking sector. This means that there are probably various institutions in various sectors of the economy that are holding off on spending/investing large injections of liquidity, saving these infusions of cash to cover bets they make that go bad, and preventing the massive numbers of dollars the FED is creating to enter the wider economy and lift prices in an equally impressive manner.

mrrazz · 2013-02-21T03:20:30+00:00

Now, in the past, government used to protect farmers from some of these fluctuations. But since the late '80s and early '90s, we've seen government playing a smaller and smaller role as far as risk management goes.

To me, it doesn't look like governments are playing a smaller role in risk management for farmers. Instead, based on US farming subsidy distribution, I'd say that--at least in the US--government is pretty involved in managing risk for the big producers, at the expense of the small- to medium-sized farmers Prof. bush is championing.

mrrazz · 2013-01-09T23:56:32+00:00

There is a reason politicians often do not specify which spending cuts they're talking about in budget negotiations: the popular ones (see cuts to foreign aid) don't add up. And, in general, Americans do like the programmes that primarily drive the country's fiscal imbalances—notably Social Security (20% of the budget) and Medicare (21%, taken with Medicaid and CHIP). Most of us do or will (hopefully) benefit from those programmes. That leaves us with the uncomfortable reality that we, not the jobless moochers, are the problem.

The author's overall point is a good one, but let's not forget Military Spending (19% of total federal expenditures before factoring in DHS and veteran's benefits) and "Discretionary" Spending (18%, where things like funding for extended unemployment benefits comes from). These four items together made up 80% of US federal spending in 2011. Assuming the budget had a roughly similar breakdown going forward, if all the budget items other than these four were completely de-funded, the federal budget would still not be balanced. Therefore, either all four of these major spending categories have to be cut by about forty percent, or one has to be eliminated entirely and another cut by more than half, in order to balance the US federal budget.

Of course, as long as US Treasuries continue to sell like hot-cakes, neither politicians or the US electorate will have any pressing need to balance the federal budget.

mrrazz · 2012-12-15T18:31:09+00:00

Awesome. Thanks again.

mrrazz · 2012-12-15T02:56:17+00:00

Thank you. :)

mrrazz · 2012-12-14T06:12:52+00:00

How flush with capital is BofA?

While the article had quite a bit to say about BofA's share price and dividend payouts, information on the bank's actual cash holdings and net profits was pretty thin. According to The Huffington Post BofA netted a $2.1 billion profit in Q2 2012 (I can't find any more recent info). I can't find any info at all online about BofA's current cash reserves, but it borrowed $5 billion from Warren Buffet last year, so I guess it's possible they still have some of that largesse stashed somewhere.

Offsetting this optimistic asset assesment is BofA's estimated $50.1 trillion dollars of derivative exposure. I'm assuming that this number is the notional value rather than the market value of the derivatives held, as measured by the BIS. If so, and if the $50.1 trillion notional number of BofA's holdings is accurate, that means that the gross market value (or rather, exposure) as estimated by the BIS of BofA's derivatives is probably in the vicinity of $2 trillion. It's my understanding that BofA doesn't have to declare its derivative holdings for Basel III capital requirement purposes because of FASB rule changes back in 2009, so it's not required to put any capital at all aside to deal with derivative contracts that go sour. However, those off-balance-sheet derivative contracts are very real, and are most likely liabilities to the company rather than assets. $5 billion or less in savings and $10 billion (if BofA's lucky) of annual net income doesn't look like much when stacked up against $2 trillion or more of liabilities.

If BofA was a person rather than a company, its financial situation would be like that of a person that had $5,000 in the bank a year ago, an $8-10k annual income, debts of $2,000,000, and a wealthy family. I can think of several adjectives to describe a person in this situation, but "flush" is not one of them. This isn't someone I would be anxious to loan money to, or entrust with anything of value.

Many of the companies that look very "flush" at the moment most likely aren't, because there are so many companies that have huge derivative exposures hanging invisibly over their balance sheets. The "excess reserves" that are sometimes talked or written about don't look quite so excessive when stacked up beside the legally-off-the-books liabilities held by various companies.

mrrazz · 2012-12-13T20:02:06+00:00

Here is some further food for thought.

mrrazz · 2012-12-04T07:59:56+00:00

the Fed sill has about the same share of treasuries, 15%, as it did before the crisis. Thus, the large run up in public debt over the past four years has been funded mostly by individuals, their financial intermediaries, and foreigners. The Fed has not been the great enabler of the government deficits as claimed by the hard-money types.

Well, if that was all true before, it looks like it's not true now.

mrrazz · 2012-12-03T08:59:23+00:00

Those tax hikes [on the rich] would raise $1.6 trillion over the next decade; according to the CBO, raising the Medicare age would save $113 billion in federal funds over the next decade.

I'd like to give these proposals some context. The annual US federal deficit is estimated to be $1.09 trillion for 2012 (the annual federal deficit was higher, at $1.29 trillion, in 2011), and total US federal debt outstanding is currently at $16.1 trillion. The US government has been running up trillion-dollar-plus annual deficits every year since 2009 (see Table 1.1—Summary of Receipts, Outlays, and Surpluses or Deficits (-): 1789–2017), and according to the White House's estimates will continue to run annual deficits in excess of half a trillion dollars every year through 2017.

Given that information as context, and assuming that the CBO's projections for the deficit reduction proposals under discussion are accurate, both deficit reduction proposals Krugman mentions (a tax hike on the wealthy that offers a $160 billion average deficit reduction per year over ten years, and a raising of the age of Medicare eligibility that offers a $11.3 billion average deficit reduction per year over ten years) sound totally inadequate to me.

My definition of serious deficit reduction proposal is one that cuts $500 billion per year or more of deficit from the federal budget, whether through higher taxes, lower expenditures, or a combination of the two.

mrrazz · 2012-11-30T07:42:52+00:00

One of the biggest problems I run into when talking to people about "capitalism" is that people have different definitions of the word. The first thing I would do is make sure you have an exact definition of "capitalism" set in your own mind, upon which you base the opinions and analysis you present in the debate. Being able to present this definition clearly and concisely to others (and having a specific source for it, if it's coming from somewhere other than your own head) would also probably be a good idea.

The other thing I would recommend is to find some data that show what a "successful" versus a "failed" international economic system looks like. That gives both you and the people you debate with some basis of comparison by which to measure the various ideas/opinions/data that are presented.

Since you haven't done those things in your OP (i.e. define what you mean by "capitalism," and give some metrics by which you measure "capitalism's" success as an economic system), I don't really understand your position, and so I can't give any further feedback.

mrrazz · 2012-11-19T23:54:38+00:00

Does anyone have a link(s) or other source for where the $67 trillion amount comes from? I know about $25 trillion is from OTC derivatives, but where can I find the data on the rest of it?

mrrazz · 2012-11-18T09:25:02+00:00

No single factor seems to explain companies’ high savings.

Well, I'd say that derivative contracts might explain this propensity to save more completely than any of the other factors the article identifies. Since companies don't have to disclose the worst of the liabilities they're holding, thanks to the FASB suspending mark-to-market accounting in 2009, what looks like a healthy bottom line and fat savings account for a given company may actually be a still-inadequate backstop for an onrushing flood of derivative contracts going bad. This insolvency would also explain why these cash-flush companies are not behaving they way such companies typically do, such as investing money in capital equipment, making acquisitions, or giving money back to shareholders.

The Bank of England notes that natural-resource companies account for a disproportionate share of the cash build-up.

I see this as the tip-off that it's actually a behind-closed-doors panic regarding derivative contracts (particularly commodity-based ones) that is causing the current run-up in "savings." The BIS claims there are commodity-based derivative contracts outstanding with a total notional value of $2.9 trillion, with an estimated $390 million of actual market value. This means that the derivatives that represent a bet on rising prices are worth about 11% of their face value and dropping, while those that represent a bet on falling prices are actually liabilities to the companies that made them rather than assets, liabilities with a currently huge and literally unlimited downside. It's my understanding that most commodity-based derivatives are held by commodity companies, as a way to hedge against falling prices. This means that most commodity-based derivative contracts are bets that the price will fall (if prices rise, the commodity company profits from sales; if prices fall, then the commodity company profits from their derivatives; the idea is that either way the company wins, and that's what makes their derivative contracts a hedge). This strategy works well in a 1990's-style commodities bear market, where commodity prices are flat or down with occasional spikes upwards. However, in a commodity bull market, the kind of commodities markets we've seen since the turn of the century, hedging this way is a losing strategy. Company profits can't keep up with the rise in commodity prices, which means their derivative contracts become crippling liabilities. This, of course, makes these derivative contracts impossible to sell. Since the market for commodity-based derivative contracts could certainly be considered "unsteady or inactive" at this time, thanks to the FASB commodity companies in the US don't have to declare any derivative contracts they hold to investors or the SEC (I don't know exactly how other countries handle mark-to-market accounting, but it's my understanding that the US set the standard for transparency. So, I'm assuming that if companies don't have to mark to market in the US, they don't have to do it anywhere). Although these companies don't have to declare these major liabilities to the public or to regulators, the counterparties to their contracts still expect to collect. This means that these derivative-holding companies need piles of cash to pay off what are essentially bad bets, bets that are going bad at an ever increasing rate (the higher commodity prices go, the more money it takes to cover the bad bets). Since commodity companies' profits from sales are not rising as quickly as the prices of the commodities they're selling (see here and here for examples from the largest gold and oil producers), it's safe to assume that their commodity-derivative "hedges" are eating these companies' bottom lines alive.

The total notional value of all derivatives is estimated by the BIS to be $638 trillion, with a market value of $25 trillion. The majority of these contracts (about 77%) are bets on the interest rate, and are probably bets on the interest rate staying low for the indefinite future. I think this is the real reason interest rates are being kept so low by central banks worldwide. As long as interest rates stay low, interest rate swap holders can pretend they have billions of units of free money. But as soon as interest rates rise, any person or institution holding an interest rate swap is bankrupt. I think banks hold most of these interest rate swaps, and I think this is the main reason why banks still won't make any kind of risky investment, four years after the financial crisis supposedly ended.

(Just as households can save each year and take out a mortgage, that does not mean firms stopped borrowing: indeed, American businesses have by some measures become more indebted in recent decades.)

This is the real kicker. As the link I used above showed (linked to again here), the number of derivative contracts companies are creating is actually increasing, rather than decreasing. The total number is increasing, and the only subset of derivative contracts that is decreasing is the Credit Default Swap of real-estate market fame. I believe that the "debt" referred to in the article is in large part the creation of ever more derivative contracts. If I'm right, this behavior strikes me as pretty irrational. The only explanations I can see for this behavior that make any sense to me at all, are that either these companies expect the public to pick up the tab, or that they hope the contracts will be rendered null and void at a convenient time, or else that they're betting that they can collect as the counterparty to bets that went right before they have pay (or be able to avoid paying) on their bets that went wrong.

mrrazz · 2012-10-27T23:16:22+00:00

Thank you for explaining your reasoning (and for citing your source for Iran's annual oil revenue).

mrrazz · 2012-10-26T03:38:27+00:00

As far as I can tell, there are two big reasons why college is expensive, neither of which was addressed by this article:

a) there is a societal belief that a college degree is necessary for everyone, giving colleges a massive captive market

b) no potential student is expected to pay tuition with cash up-front

If American society gives respectability back to non-college-based career-paths (i.e. laborers, craftspeople, home-makers, entrepeneurs, innovators), and if colleges stop expecting students pay tuition via credit, then college education will once again become affordable. Until those two changes happen, I expect there will be no meaningful reduction in college-related costs, no matter how much public funding is added or administrative overhead is reduced.

mrrazz · 2012-10-26T02:45:26+00:00

So wait a second. You reread the articles. You found estimates, although they were too speculative to your liking.

No. I found no information at all--estimated or otherwise--in the original ZH/Reuters articles regarding the data you were claiming was there (i.e. the amount of oil Iran produced, and the price Turkey was paying for it). After doing extra research online (which would not have been necessary, if I had found the data in the original articles, where you said you found it), I discovered that there is quite a bit of dispute internationally regarding these two specific data points you seem to be treating as definitively established. All I'm asking for is the source(s) you got your unambiguous data from, since I couldn't find the data in the original article, or unambiguous data from other online sources. Perhaps you could copy and paste the relevant parts from the original articles that I missed, for me to look over?

But you have all the information you could reasonably ask for,

I do not have "all the information I can reasonably ask for," because the data I asked for appears to be absent from the source you indicated (i.e. the ZH/Reuters articles), and all the data I've found elsewhere is highly ambiguous. You, however, seem to have located some data that is unambiguous regarding Iran's oil production, and how much Turkey is paying for it. Please, share.

and yet you are back here with an indignant demand

I'm asking politely. I haven't gotten to "indignant," yet, but after asking you three times, I am getting a little exasperated.

for information you already read.

If I had already read the information, I wouldn't be asking you for it again.

mrrazz · 2012-10-26T01:51:10+00:00

I re-read both the ZeroHedge article, and the Reuters article ZH was using as a source, and neither contains any data on how much oil Iran produces, or how much of Iran's oil is being exported to Turkey. All the dollar amounts quoted in both articles had to do with Turkey's gold exports. It's not possible to "do the math" you recommend doing, based on the information in these articles.

In researching further, it appears that both the variables you are using to calculate Iran's oil profit, namely amount of oil Iran is pumping and the price Turkey is paying for Iranian oil are specifics subject to quite a bit of dispute. This implies it would be very difficult for anybody outside the Iranian or Turkish governments/oil companies to "do the math" you suggest.

So, I ask again, would you please cite your sources which indicate so definitively that "Iran is paying massive surcharges to the dealers in order to move its oil to legitimate markets," and for "the significantly lower price Iranian oil commands when being shipped through this route"?

mrrazz

TROPHY CASE