Economics: Why are mainstream views different from reality?

Discussion in 'Economy & Infrastructure' started by panduranghari, May 16, 2012.

  1. panduranghari

    panduranghari Senior Member Senior Member

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    Hi SGU,

    I have started another thread as we were digressing from the main topic.

    Could you please inform me what constitutes conspiracy theories? Does a theory not backed by CNBC or Wall Street Journal come under the general remit of conspiracy theory? Also when can a theory be called conspiracy theory?

    What are your opinions on the mainstream views? If mainstream media does not constitute mainstream views, then what does?

    I shall ask questions as we get the conversation going.
     
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  3. trackwhack

    trackwhack Tihar Jail Banned

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    ^^ Good luck sir. All the budding Amartya Sens are gonna come knocking.
     
  4. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    Thanks for starting the thread.

    Some quick points to note:
    1. We usually mix finance and economics here. These are two different things.
    2. Mainstream media is pretty much ignorant when it comes to reporting economics except when articles are written by some of the active academics.
    3. I remember you pointing me to alternative data sources and rejecting the WB data as something that is cooked up. And then the articles you point to sometimes constitute are no more than conspiracy theories. Although, using the word conspiracy is somewhat harsh on my part.

    I will give you one example on mainstream view(generally propelled by ignorant journalists):
    Here, Trackwhack is blowing the financial debt of UK out of proportion. Let me tell how(I am using bank as a generalized term for financial intermediaries):
    1. Bank is intermediary and do not eat money. They borrow from people/firms and lend it to people/firms.
    2. To avoid double counting financial debt do not include lending to households and non-financial institutes.
    3. So, effectively banks are always in financial debt due to this counting. Else there is no reason for a bank to be in debt.
    4. More debt means more business.
    5. It does not reflect the fact who are the borrowers from UK institutions. They borrow and lend all across the world, but financial debt is counted on part of UK.
    6. So, debt becomes a problem only when it is toxic or borrowers are unable to return back to banks. Else, there is no reason to worry about financial debt as long as it is not toxic.
    But media will blow it out of proportion and then it spreads like fire.

    Most active academicians and policy analysts write blogs. A good combination of these constitutes a balanced mainstream view.

    Hope I explained my point. Will write more as we further discuss the issues.
     
  5. StarShip Enterprise

    StarShip Enterprise Regular Member

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    hope it brings out lot of skeletons !!!
     
  6. panduranghari

    panduranghari Senior Member Senior Member

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    I shall reply in due course. Thanks for picking up the gauntlet.
     
  7. panduranghari

    panduranghari Senior Member Senior Member

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    You are welcome.

    True. Unfortunately, the economists are becoming more and more intertwined with the current financial arrangement. The economists have learnt teaching alone is not going to make money. Hence they are now advising most hedge funds, mutual funds. The financial models on which the insurance industry, hedge fund industry works is created by these economists. I am sure you are aware of this.

    Here is an excerpt from Wikipedia;

    And here is the crux. The Austrian school of economics was ridiculed from 2003 onwards until the crisis as they predicted the fall of the current economic system;



    As you can see from the earlier clip, the main stream media who reports finance is the source of all this rubbish we hear. The World Bank and IMF is the creation of west to control resources of the rest.

    You can read about it in a book called ' confessions of an economic hit man'

    http://www.economichitman.com/pix/cehmexcerpt.pdf


    Partially correct. Banks do not borrow from people. They borrow from the central bank or from another bank and lend to people.




    So who counts the debt? If you are a rich man, you park your 100 million dollars in your bank. Just assume you are the only creditor to the bank. Your bank effectively owes you 100 million dollrs. They will lend me 20 million as I want to start a business. They will lend to 50 others the 80 million left but the lending is in excess of 80 million. Thats how they will make money. Everyone sells debt to the next buyer. Everyone feels they do not own the debt anymore. What we are seeing in Greece is the symptom of the problem. The problem is debt was sold as a saving. Its antithetical both both to last until someone calls the bluff.

    Here is a video about the same;



    Agreed. And hence we can see inspite of constant request from Obama the big banks are not lending. They do not want to be short of cash like Lehman Bros was in 2008. The way I see it is such, the real austerity demanded from USA and UK will never happen. They are blaming poor old Greece. The simple difference is Greece cannot print Euros as only ECB is allowed to print Euros. US Federal Reserve is printing to bail out the US govt. Just see whats happening in California and many other US states. Except Texas most of US states are broke. And neither can these states print, they have to rely on handouts from Washington. And these states do not own any gold. Greece owns at least some gold.

    Here is what my friend writes on his blog;

    FOFOA: Of Currency Wars

    Agreed.

    5. It does not reflect the fact who are the borrowers from UK institutions. They borrow and lend all across the world, but financial debt is counted on part of UK.

    The financial debt should never have become a part of UK national debt. It however did because the government bailed out the banks thus took on the debt themselves. Thus shooting themselves and their country in their feet.

    The media you describe is the same who obfuscates data. If you honestly believe in the data published by government which indicates the various indices, you are mistaken and you have been taken for a ride. In the UK, the Consumer Price Inflation (CPI) is calculated by including 50 different things which constitute the things consumers need on a regular basis. The problem is the people who calculate the inflation chop and change things which fit into the basket for calculation. If eggs, milk, apples, petrol, tee shirt, bananas, paper constitute the basket and they use the prices of these goods to calculate the CPI, if apples get expensive but if pears have got cheaper - they will substitute apples for pears. Thus they give us a data which claims to be accurate, but it is actually doctored to make them look good. They have been in this business for a long time.

    [​IMG]
     
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  8. panduranghari

    panduranghari Senior Member Senior Member

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    There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.

    By Ludwig von Mises

    Ludwig von Mises Institute : The Austrian School Is Advancing Liberty
     
  9. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    Sorry, for the late reply. I was away from my computer for some time.

    As I expected, you are smoking Austrian economics. Will give you a detailed critique of their basic premises soon after I watch the videos that you have posted. But would make some quick comments from what I read above.

    Its good that you agree with the financial accounting thing and that the debt shows on part of the financial institutions. In case of UK, the bailout shifted some of the financial debt to govt. debt and the figure that you see now for financial debt is the debt on financial institutions. This debt is backed by some form of collateral, and has the minimum exposure to Greece among the European banks. Any form of debt can turn out to be toxic in the future but that does not mean you stop lending. But it is good that you agree here on the financial accounting part. And banks borrow from everyone and not just in between themselves or central banks(how can you forget the FDs people have in India and their counterparts elsewhere).

    On the CPI part, no economist believe one or the other measure completely captures inflation. All nations use variety of indicators for measuring inflation and the basket used is reported all the time. But, the basket does not change that frequently as pointed by you and it is reported. And not to forget the fact that there are families which report their consumption, so if prices of apples increase and families replace it with pear it would be reflected in the basket. So, that does not mean inflation has increased if families replace more or less the goods in the same category. So, inflation is a subjective statistic and people use it with caution depending what their point of interest is. Similar is the case for other indicators like Producer Price Index, GDP deflator, PPP calculations etc. People use them because these indicators are better than other naive calculations. The individual economists on the other hand try to bust govt. interpretations rather than support them. And the world is not controlled by PRC, so it is almost impossible to fudge the data. Economists are hawkish about pulling govt. legs as their is no one grand theory that unites all economists for a single cause. Statistics have to be taken with a pinch of salt to understand their implications, which economists understand and layman does not. For eg. You pay your maid 50k a year, but if she marries you then you pay nothing, although she might still do the same work for you. The GDP in the later case, given as we measure it today will fall by 50k. So, there are always problems in measurement of things and one has to keep eyes open for the pitfalls rather than look for conspiracies.

    On the money supply front, all I can tell you right now is that there is no reason to keep the amount of money in the economy hostage to the amount of amount of gold in the central bank's vault. This is a wider subject and would share the appropriate links with you soon.
     
    Last edited: May 20, 2012
  10. panduranghari

    panduranghari Senior Member Senior Member

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    You have claimed -- This debt is backed by some form of collateral---

    Could you please tell me what collateral?
     
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  11. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    When you go and buy your car, they do check your salary statements. But if you buy a house, the house acts as a collateral.

    Similarly when loans are given to start-ups sometimes they look for viability of the idea other times they ask for share of the firms. If an established firms wants to expand, the collateral is the firm itself. Hope you have heard the concept of leverage that banks use in giving the loans. Given the size of London financial market, there must be different types of collaterals at work and not to forget the fact that banks would have tried to diversify the types of collateral they collect.

    It is only in case of loans to govt., for eg Greece that govt treasury bonds act as collateral, which is where you can show some concern.
     
    Last edited: May 21, 2012
  12. panduranghari

    panduranghari Senior Member Senior Member

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    The Greek government bond is backed by what?
     
  13. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    The way your salary statement is backed by the belief that you would not default. Govt. bonds are backed by the indefinite stream of taxes it can raise.

    But now, I know the next question that you will fire at me. But I would reiterate here, it is not just the govt. that borrows from financial institutions.
     
  14. panduranghari

    panduranghari Senior Member Senior Member

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    Even if Greeks pay 100 % tax on their income, they could not pay by all their debt. The story is not much different in most of the world. It's actually worst in USA and UK. The good thing as reported by the Financial media is these countries can print their own currency out of thin air so they are not facing real austerity for now.

    Why should govt buy from financial institution s? They borrow by issuing their own debt. This debt is backed by nothing but the belief that the government will ensure the creditors are paid back. What we are seeing in Greece is the inability of Greek govt to Pay it back . The debt is Greek, the creditors are rest of EU and USA. These countries will rather get whatever it can get than allow Greece to default.

    The problem is not Greek debt. That is the symptom of the problem. The problem is the buying and selling of debt.

    A system as such has reached the Keynesian endpoint.

    The mainstream media does not understand this and hence they do not report it.
     
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  15. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    For some reason you seem to be fascinated by debt theory of the Austrians.

    So, I will dissect your arguments again. There is a lot of accounting going on in the above arguments that you need to be aware of. I will tell who is in debt and how:
    1. Say Barclays raise 100$ through retail operations and is free to lend it. So, this would be counted as an addition to financial debt whether Barclays lend it or not. If it lends, it will usually ask for a collateral.
    2. Govt. of Greece issues bonds to raise 100$ through free market operations(which is the usual practice). This would be added to govt. debt of Greece.
    3. Barclays comes and buys these 100$ bonds assuming that Greek govt. would pay it using future tax revenues.
    So, you can see the above debt accounting stands. While Barclays adds to its financial debt, Greece too adds to its govt. debt. Hope this point gets across.

    Now coming to the second argument, whether Greece can pay back or not. It is not about paying back in one year but under some finite horizon of time. There is this concept of Ricardian equivalence, whether govt. should finance its expenses through bonds or taxes. Under suitable restrictions, it does not matter how the govt. raises this money. Due to the formulated policies, the govt. are always in debt(sometimes war or say financial crisis). I will again give an example to hammer in the concept of govt. debt and when to worry and when not to worry. Given that the govt. is believed to be ever-lasting it never actually pays back except like in case of Greece where it has reached tragic proportions and has to be dismantled.
    Eg. You must have heard that IMF and world bank starts raising their voices once the fiscal deficit of a country goes around 3% in developed world. But in case of India it is well above 5%, but still does not raise any eyebrows. Say GDP of India was 100$ and govt debt 50$ at the start of year(50% of GDP). Due to high expenses the taxes could not cover entire expenses and leaves a fiscal deficit of 5% ie 5$. So, govt debt increases to 55$. But India grows at 10% per annum, so the GDP grows to 110$ and the debt to GDP ratio still remains 50%. As long as the country has enough growth to cover its fiscal deficit in the long run there is no problem. If say the deficit was just 2% ie 2$ the new debt to GDP ratio would have been(52/110 less than the previous year). If you remember the recent debates of Pranab, he was concerned with this very fact, because as you can see above we need a high rate of growth to keep the debt-GDP ratio under control else it erodes the credibility of govt to pay off in the long run.

    Coming back to Greece. The reason people do not want Greece to default is because it erodes credibility of different institutions and create a bad atmosphere for investment. That is how 30s saw the worst depression. It is best for Greece to default in short run and start afresh but in the long run Greece's credibility will take a hit and in a highly interconnected world they would not be able to support themselves through domestic market. Just like its creditors, it is as much in the interest of Greece to not default. I do not want to continue giving open ended answers like debt is bad or good, but rather prefer case studies.

    The reason the US govt. had to intervene was because of the crisis and they have done more good in handling the crisis rather than what is being professed by some Austrian counterparts. The decision is yours whether to take small suffering over a longer period of time or take a big one in one instance. The current policy of Fed is working in the first direction. But more about it later. Hope it did ring some bells.
     
    Last edited: May 21, 2012
  16. panduranghari

    panduranghari Senior Member Senior Member

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    Not just me. Angela Merkel and Sarkozy were fascinated and scared of the debt too. So are many people who are eye balls in debt. So are those who are the creditors. They are worried too, lest they get nothing back. Anyone who has not yet heard of Greece and their debt must have not read or seen about it on the MSM.


    We agree on that.

    Yes government can raise the money in whatever way its possible. They can do by raising taxes. The taxes can go so high that the economy effectively becomes a cash economy or cash+kind economy. Perhaps undisclosed and unreported to the tax authority. Or people come out on the streets protesting very high taxes. Political suicide. No wonder we have a bureaucrat in power in Greece. He cares for nothing like political survival. He is doing a job of imposing the necessary
    cuts which will balance the economy. There is no chance greece will balance itself under the current economic system. The current system relies on expanding debt which will make socialism possible. I personally see the welfare state in the west in the form of benefits to be gone very soon. Swedes love to think that they can have a very high standard of living due to 90% tax and welfare for all. I doubt if such an economy is sustainable.

    The other thing the government can do if tax increases are not politically palatable is to debase the currency.

    This shows exactly the thing.

    [​IMG]

    Inflation is a hidden tax that we all pay for holding decreed money also called Fiat Currency also known as notes like pounds, dollars etc. Its hidden from general view.

    I ask you this,
    If money was stable, would you need to chase an Yield? Would you risk it in stocks or bonds or options or warrants or exchange traded funds? I for one have neither the time nor the inclination to do invest in trading or constantly watching the money.

    I would rather spend time doing what I think I can do best. And that is not possible with todays economy. I came into the financial discussion in 2008 when the economy was in doldrums. Until then I was oblivious to the risks. I had a reasonable share trading account. A good friend always says,' You do not own your stuff, your stuff owns you.'

    What he means is we always have the baggage and sometimes this baggage does not allow us to see something very obvious.

    I told you I have no problem with debt per se. The problem is with the non availability of a suitable extinguishable mechanism to say the debt is cleared. At a high enough price physical gold can do that. And since Bretton Woods in 1944 this was not available as gold was constrained by gold standard or gold exchange standard.

    This is what my signature says,'Gold is an asset based currency, thus it represents payment in full, where as fiat currency is a debt based currency that represents a claim in the system. In this light, the ‘preservation of wealth’ simply means - he who holds gold has already been paid."

    I think the Euro is taking us that way.

    What I have highlighted clearly shows the problem within the system. We need infinite growth to achieve infinite GDP to keep the infinite debt under control.

    That is not possible as this video shows; ( see the whole 8 part series- its awesome)

    The greatest short coming of a human mind is its inability to understand the exponential function.

    The Most IMPORTANT Video You'll Ever See (part 1 of 8) - YouTube

    I end this with a von Mises quote

    There is no means of avoiding the final collapse of a boom brought about by credit (debt) expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit (debt) expansion, or later as a final and total catastrophe of the currency system involved.
     
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  17. aerokan

    aerokan Regular Member

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    Perfectly put. Those who are indoctrinated by the current financial logics cannot mould their thought process to see the facts. And then they wonder why they couldn't figure out the possible recessions. The simple fact is if there is no debt, there wouldn't be any money in the current perpetual financial monetary system. The current system is designed to make people go bankrupt with a 100% certainity
     
  18. pmaitra

    pmaitra Moderator Moderator

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    This post was a gem, a jewel, an eye-opener, and, very depressing.

    I had always spoken out in favour of Gold Standard, especially when discussing US politics, and the proposed policies of Ron Paul. I knew much about this sinister plan, but now, I know a lot more.

    I have no difficulty in speculating why the media houses of the US would be so disinterested in giving enough exposure to what Ron Paul has to say.

    We live in a strange world.

    Usury, the biggest sin on this earth, cannot be avoided by this banking cartel that controls the strings of the world. Why is Gold Standard ridiculed? Why is Islamic Banking ridiculed? Why is Marxism ridiculed? It all makes sense. Sure, Gold Standard, Islamic Banking, Marxism, are all meant for simpletons, but then to get simpletons, who most people of this world are, to participate in the monetary system, the system has to be simple. They are simple, because, it is based on the simple understanding that money cannot be created out of thin air, but lies and deception can be.



    I have worked with von Mises distribution. It is like a Gaussian wrapped around a point.

    Von Mises also predicted the collapse of the USSR.

    My humble respects to you Pandu! You are a great addition to this forum.

    On an unrelated note, could you please hand me the link to the post where you talked about the Space Shuttle's booster rockets being as thick as a horse's ass?

    Thanks!

    Edit: I found that link. :)
     
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  19. panduranghari

    panduranghari Senior Member Senior Member

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    Pmaitra,

    There is no reason to be depressed. The new system is going to be equitable.

    You do not need to live in USA to be rich, you living in Indonesia will not make you poor. You will be what you want to be. You will produce more than you consume, you will have surplus. You consume more than you produce, you will not be in surplus.

    We have been allowed to borrow to afford a car, a house, a life. The new system will not allow that.

    I am not saying you will never get loans. You will. The loans will be for creating something that will be useful to mankind.

    I have many thoughts on these matters which I have discussed at length with some others on another forum. We will see a remarkable progress of mankind. No more will the select few (10%) in the west enjoy the fruits of labour of the 90% of mankind.

    The time is closer than we all think. I for one cannot wait. It will mean I have to work harder than I currently do. But if the system is equitable and if we all can benefit, many people will be willing to let go of this inequality.
     
  20. panduranghari

    panduranghari Senior Member Senior Member

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    This may be of interest to you too.

    "Everyone carries a part of society on his shoulders," wrote Ludwig von Mises, "no one is relieved of his share of responsibility by others. And no one can find a safe way for himself if society is sweeping towards destruction. Therefore everyone, in his own interest, must thrust himself vigorously into the intellectual battle."
     
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  21. Sakal Gharelu Ustad

    Sakal Gharelu Ustad Detests Jholawalas Moderator

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    Scared of bad debt!!

    Good that we agree here when I explained the statistics and the double counting.

    People are talking about austerity even in Greece and that is a political decision. No time in history did we have a currency completely backed by gold. It always has had fiduciary money on the side. The above system you are advocating is as susceptible to socialism as any other system.

    Everyone in mainstream economics know that increase in money supply goes directly to inflation in the long run. So, nothing new about that graph. But it presents only half the picture. Although there was an increase in money supply but still the living standard of Britain went up during this time.

    So if we use a gold backed currency inflation would be directly related to how much gold is dug in an year rather than the productivity increase in the economy. This system is guaranteed to cause deflation if the supply of gold dwindles below what is required for smooth functioning in the economy and it would further lead to increase in unemployment and worsening of the economy. Rather than using a gold standard, we need a monitory policy based on some rules like we have constitution for dealing with other stuff. But jumping to gold standard is an equally big fallacy.

    Leaving you with this:


    You can find the complete article here with a few good things about Austrian economics: Why I Am Not an Austrian Economist

    And yes we do not need infinite growth to maintain debt-GDP ratio. It is always a political decision whether to tax the current generation or future. But someone will always pay in the end. So there is no point in putting the blame on monetary policy for something that has its roots in our political follies.

    Another glimpse in what mainstream economists believe: http://www.mpls.frb.org/research/qr/qr1931.pdf
    (You can go to the last pages of pdf to look at the graphs which explains the present view of macroeconomists)
     
    Last edited: May 23, 2012

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