Enslavement through Financial Systems

[Sakal Gharelu Ustad]

BTW, Western economic interests seemingly converge (although I doubt it) because they don't have a choice. They have integrated their economies so closely in the last several decades that a hiccup in one economy will make a sneeze in another. The same kind of integration can be seen in Asia but maybe not in the same extent.

But that is the whole idea of insurance.

 

[Sakal Gharelu Ustad]

So what it all boils down to:

• innovation
• resources
• labour

A dump of red soil - doesn't mean much.
Wood by the road side - doesn't mean much.

So, innovate, and make iron out of the red soil, beat it to shape and carve a handle out of the wood, and make a hammer.

Innovation + Resource + Labour = wealth, and the only real currency.

There you go, you have produced wealth.

I will count labor under resources.

To tweak the summary a bit, growth would actually come from:
Resource efficiency
Innovation

For developing countries, achieving the first should be the goal. There is a long way to achieve resource efficiency.

For developed countries, it is only innovation which can turn the wheels of growth, since they have almost achieved the first goal.

 

[Mad Indian]

So basically the rich get richer after recession while everyone else takes a hit.

You yourself have provided the reason for it

The standard of living is already going down in the west but only for the working middle class! Basically resources and energy are limited and the more number of people who get access to it means those who already had access will get less of it or will pay more for the same quantity.

 

[Mad Indian]

No, it's not. The train of thought is correct. That is exactly what we measure in long-run Solow and Harrod-Domar models- growth in steady-state.

Refer to the graphs in the link as you read this. Neoclassical growth model - Wikipedia, the free encyclopedia

Note: We will be assuming a closed, no-trade economy and then contrasting it with an open, free-market economy to highlight just where the trend of thought diverges from the conclusion.

Also note, per-worker and per-capita are used interchangeably.

Before, we embark on this discussion, it is useful to know what a 'steady-state' is. The steady-state, in economics, is the state where increasing entropy of the resource-goods conversion has placed a limit on the amount of economic growth, so that it is no longer technologically, environmentally, ecologically or otherwise possible or feasible to increase production and for that reason, both consumption and population remain stable. This is a philosophical-sociological-ecological construct (the "carrying capacity of an organism) in economics and biology, and is one borne out of moral and ecological concerns and perceived limits to technology it is not an actual physical or real constraint. But it is one with sound, if yet unproved, ground nevertheless.

Now in our neo-classical models elucidated in the the wiki link, and among most economists and classical economic proponents of the limits-to-growth theory, steady-state growth is assumed to be a linear growth that is a function of the rate of perceived technological progress and the rate of labor force (population) growth. The rate of the steady-state growth, which is a long-run growth, and understood as the slope of the black line in the diagrams, is itself assumed to be a function of the change in capital in the long run (the capital replacement rate: which is a net of some function of the Savings rate and the rate of capital depreciation) aggregated by the number of workers. Since in the long-run, as seen in most Western countries, the population growth rate slows to a small positive or to zero, it is not a key variable in the determination of steady-state growth. So, long-run steady state growth, is in current neo-classical economic understanding, determined principally by the all important rate of capital formation, or the net capital change or capital replacement rate, aggregated by the number of workers. In other words, capital-per-worker change is the key determinant of long-run growth. The net capital change per worker is measured as investment-per-worker minus the depreciation rate of capital (per worker) and is what we must remember as the key determinant of long-run growth in a steady-state (an economy near its carrying capacity) economy. We measure the growth rate: change in output-per-worker. Note that the black line in the graphs correlates output-per-worker (our measure for growth and the trend increase in "living standards") to capital-per-worker.

That's the demand-side.

The other side is the supply-side and its determinant: the investment per-capita, or investment-per-worker, which translates into capital-per-worker in the long-run. For our purposes, Savings=Investment, since, in a close economy with no inflation, savings translates directly into investment i.e. savings can only be invested locally, and whatever is saved is invested. This is indicated by the green, concave curves in the figure.

Note: how this assumption fails, when there is no closed economy or inflation. In an open economy, savings-per-capita may be higher or lower than Investment-per-capita: since Investments flow in or out- through domestic or foreign, institutional and direct investments. So,in an open-economy, savings-per-worker does not translate neatly into realized or real capital-per-worker. Where high Inflation, on the other hand, or a steep growth in Money Supply comes in, Savings from one period does not translate directly into Investment in the next since inflation erodes the real value of Investment: hence diminishes the real capital-per-worker. It also discourages Savings itself, thereby reducing the Saving rate or prompts an outflow of Savings and Investment. All this causes the green curve, in our figure, to have a considerably more concave shape.

That's the supply-side.

So, we've got two curves to help us determine our long-term, steady-state growth.

The green curve measures real capital-per-worker (Investment) as a function of savings-per-worker (Savings). And the black line correlates the real capital-per-worker (Investment) to output-per-worker (Growth). Of course, Growth is also assumed to be a function of the population growth rate, which we hold constant or zero, in the long-run.

Now, in the model or a closed-economy with no inflation, when the savings-per-worker or real investment-per-worker on the Green curve exceeds the capital-per-worker on the black curve required in the steady-state: that capital-per-worker necessary to exactly offset capital depreciation and marginal population growth at the steady-state, there is a "capital deepening" effect- which is that there are positive, although diminishing, output returns to Capital. In other words, additional real capital-per-worker (Investment) brings in a higher real output-per-worker (Growth). So the savings rate per-worker, which is our vehicle for capital-per-worker, will, given that there are only a fixed number of workers at that point, increase till this "capital deepening" effect is completely exhausted in the short-run: to the point where there are no additional positive output returns to capital: viz. the steady-state- where capital-per-worker is just enough to offset the depreciation in capital and account for the steady-state output-to-capital returns of the small population growth, but no more.

So, in a closed economy with no technological change, that's what happens. Capital-per-worker, borne of savings and investment-per-worker and output-per-worker, borne of the given state of technology, interact to give us a steady-state rate of growth.

Now, what we call "technological growth" is simply an exogenous change through invention, innovation etc. in production methods that results in a one-time jump in output-per-worker, given the same level of capital-per-worker. In other words, for the same level of capital-per-worker, I can now produce at a certain higher level of output, given the same number of actual workers. Another way of understanding this is: that Technological growth has actually augmented the number of "effective workers" in my company, given a certain level of capital. To maintain a "steady-state" rate of growth then, which is that conceptual growth limit in the long-term, I would require a rate of technological growth, that would at least offset the change in invested capital-per-effective worker with the change in output-per-effective worker. In other words, the minimum level of technological growth needed to maintain long-run steady-state growth rate is that at which the output-per-effective worker exactly offsets the capital-per-effective worker invested.

The intuition underlying this is not hard to follow:

- If I were to consider 'n' as my population growth rate, and 'g' as my technological growth rate, then because Technology is augmenting capital-per-worker ( Capital/Worker -> K/L or simply 'k' ) and labor, L each new unit of worker entering the economy gives me a capital-per-effective worker of (n+g)k, where k: is capital-per-worker; because: 1) additional units of workers from population growth require Capital to be increased by n.K/L ('rate of population growth' x 'Capital per worker', K/L) for those workers to be of any use in the workforce; and 2) Technology, itself, is augmenting capital by g*K/L per worker ('rate of technological growth' x 'Capital per worker'). So my capital-per-effective worker with technological growth is: (n + g)k.
- To match this, I require an output that provides for a similar return of outpute- to-effective worker. No longer does my Output growth, at steady-state, only have to account for the rate of capital depreciation and population growth- it has to account for the new technology-augmented capital-per-effective worker as well [Remember: (n+g)k ] because, as you know, Capital also displaces Labour.
- The basic intuition is that, unless you replace worn-out Capital, provide each new worker entering the workforce with the same amt. of capital, and invest in capital to keep up with technology (the three conditions that our output under technology must achieve) then the level of output-per-effective worker falls despite the growth in invested capital per-effective worker. So, to achieve our steady-state level of growth, the level of output-per-effective worker, under technological change must at least be: (n+g+d)k, where d: rate of capital depreciation.​

This is not so hard when you think of it: to warrant a given level of capital investment per worker, under technological change, I must achieve a level of output, that takes into consideration depreciation, population growth and the growth rate of technology (which simultaneously makes workers more effective, but displaces some as well) itself.

In our graph, a bump up of the technological growth rate, i.e. g, would be modelled as a pivot upward of the black line, since at every level of existing capital-per-effective worker, I can now at steady state, produce a higher, in fact 'the higher level required', of output per effective worker.

Now, this is in a closed economy with no foreign trade and no foreign investment, but with technological change. Imagine, an open-economy, where technology can be imported from abroad and investments made into foreign economies and vice-versa, so that higher capital creation-per worker could accrue from a given level of domestic saving and investment. This could accrue through current transfers, net positive receipts of interest on int'l investments, current transfers like remittances, portfolio holdings, loans and trade credits, increase in rupee reserves held by foreign countries or a range of other investment mechanisms. A key assumption of these neo-classical steady-state models is that capital is subject to diminishing returns in a closed economy. In fact, diminishing returns (the concavity of the green line) is exactly why we get a steady-state level of output that is lower than what it would be if, say we had constant or increasing returns to capital. Now, real returns on capital invested, or savings, are the nominal returns adjusted by the inflation rate. In a closed economy, invested capital reaches a saturation point (the steady-state line) beyond which the real, inflation-adjusted output return to capital is negative. That is, net investment, in real-terms, as capital-per-worker reaches its long-run equilibrium when it is equal to output-per-worker. But, in an open economy, where savings can be invested abroad, the real returns to capital (the rate of nominal return on capital invested – my domestic inflation rate) don't have to be diminishing to the extent that they are in a closed economy. We have already seen why. U.S. investors in China in the 90's are an example: as opposed to the U.S, where investment retention probably have earned diminishing returns, U.S. investments in China in the 90's actually earned increasing returns. In fact, if enough markets are sought, the diminishing returns could be delayed for a very long time. From a modular perspective, that would mean an adjustment of the concavity of the green line by making it much less concave, pushing steady-state output and capital per-worker much higher. And we haven't even taken into account the effect of technological change yet! Exogenous (modelled outside the model) bumps in technology could, for the same level of capital invested-per-effective worker, push the output-per-effective worker ever higher (this is illustrated by a pivot upward of the black line) so that for all levels of capital-per-effective worker, in both short and long-runs, output-per-effective worker is higher.

Now, why was all this important? Because, while you have correctly identified the relation between inflation and growth in the short-run, the long-run growth determinant is actually capital creation per-capita. So, while high current and expected inflation has everything to do with the impact of Savings on GDP growth through the Investment component of GDP: by diminishing the rate of Saving and through the exchange rate under the uncovered interest parity equilibrium. In the long-run because markets are free and because Saving can be invested abroad, domestic inflation does not bear the same relation with domestic capital creation - unless consistently high and that too, higher than the highest available nominal rate of return. On the other hand, a consistently low rate of inflation, as has been the case in most Western economies for many decades now, and a low expected rate of inflation has exactly the opposite effect with respect to technological change: it acts as a catalyst for technological growth in the long-run in an environment where markets are highly developed, slight product differentiation is essential, competition is largely technique- or marketability-based and a large number of competitors in the market exist.


A little inflation (as in the case of most Western economies) is good for growth, because it is necessary to bring about the guarantee of price rise, that is necessary for long-term investment and adapting to technological change. Given a highly competitive economy, or one that is becoming highly competitive, an investor will be reluctant to invest unless he knows that prices are going to increase. That is because, given an exogenous technological bump, adopting the technology entails restructuring costs that the investor is unlikely to recover, unless prices rise in future. By making the production process more efficient: through Technological change in the productive process, I can increase profits in a competitive market, with stable market shares, only if prices are expected to increase. The expected price increase (expected inflation) is justified in a perfectly competitive economy only to the extent that it accounts for my restructuring and reinvestment costs. Consistently high inflation actually reduces my profits in the long-run to the extent that it impinges upon domestic Consumption- of also my goods. In the long-run, a low expected rate of inflation, by being positively correlated with the interest rate, provides a reason for foreign investment by increasing the Time Value of Money. A high inflation rate, of course, along with high expected rates of inflation prompt capital flights and a reduction in savings, investment and capital-per-worker. A low current and expected inflation rate also makes it viable for companies in developed markets to adapt to technological change, thus justifying the reason for the process itself.

Inflation and economic growth bear a non-linear relationship; there is a threshold beyond which there is a trade-off between growth and inflation. But below this a modicum of inflation is necessary to sustain growth.

Can you please give a summary of your post? I read it, but i need a summary to understand it better.

 

[Rage]

Can you please give a summary of your post? I read it, but i need a summary to understand it better.

Well, if you're looking for a non-technical summary that's to-the-point, here's your answer:

Now, why was all this important? Because, while you have correctly identified the relation between inflation and growth in the short-run, the long-run growth determinant is actually capital creation per-capita. So, while high current and expected inflation has everything to do with the impact of Savings on GDP growth through the Investment component of GDP: by diminishing the rate of Saving and through the exchange rate under the uncovered interest parity equilibrium. In the long-run because markets are free and because Saving can be invested abroad, domestic inflation does not bear the same relation with domestic capital creation - unless consistently high and that too, higher than the highest available nominal rate of return. On the other hand, a consistently low rate of inflation, as has been the case in most Western economies for many decades now, and a low expected rate of inflation has exactly the opposite effect with respect to technological change: it acts as a catalyst for technological growth in the long-run in an environment where markets are highly developed, slight product differentiation is essential, competition is largely technique- or marketability-based and a large number of competitors in the market exist.


A little inflation (as in the case of most Western economies) is good for growth, because it is necessary to bring about the guarantee of price rise, that is necessary for long-term investment and adapting to technological change. Given a highly competitive economy, or one that is becoming highly competitive, an investor will be reluctant to invest unless he knows that prices are going to increase. That is because, given an exogenous technological bump, adopting the technology entails restructuring costs that the investor is unlikely to recover, unless prices rise in future. By making the production process more efficient: through Technological change in the productive process, I can increase profits in a competitive market, with stable market shares, only if prices are expected to increase. The expected price increase (expected inflation) is justified in a perfectly competitive economy only to the extent that it accounts for my restructuring and reinvestment costs. Consistently high inflation actually reduces my profits in the long-run to the extent that it impinges upon domestic Consumption- of also my goods. In the long-run, a low expected rate of inflation, by being positively correlated with the interest rate, provides a reason for foreign investment by increasing the Time Value of Money. A high inflation rate, of course, along with high expected rates of inflation prompt capital flights and a reduction in savings, investment and capital-per-worker. A low current and expected inflation rate also makes it viable for companies in developed markets to adapt to technological change, thus justifying the reason for the process itself.

Inflation and economic growth bear a non-linear relationship; there is a threshold beyond which there is a trade-off between growth and inflation. But below this a modicum of inflation is necessary to sustain growth.
Rage ↑

 

[Mad Indian]

Well, if you're looking for a non-technical summary that's to-the-point, here's your answer:

Ok

But I cant understand one part. here the assumption is made in the closed system and is extrapolated to an open one, right? Is that possible/or is it accurate?

Anyway, dont bother, I wont understand anyway. Will revisit this thread after I read a bit in the subject

 

[Rage]

Ok

But I cant understand one part. here the assumption is made in the closed system and is extrapolated to an open one, right? Is that possible/or is it accurate?

Anyway, dont bother, I wont understand anyway. Will revisit this thread after I read a bit in the subject

Certainly is. The extrapolation is possible by relaxation of certain assumptions in a closed economy. That, unfortunately, requires following of the argument.

I'd be happy to answer your questions, if you have any, after you read up on that bit.

 

[pmaitra]

@Sakal Gharelu Ustad, you are correct. I just gave a simplified example.
@Mad Indian, you just got an example involving the hammer. Don't get me started on the sickle.

 

[Mad Indian]

Certainly is. The extrapolation is possible by relaxation of certain assumptions in a closed economy. That, unfortunately, requires following of the argument.

I'd be happy to answer your questions, if you have any, after you read up on that bit.

Actually I read it twice and still could not get the reasoning

Anyway, thanks

 

[Rage]

Actually I read it twice and still could not get the reasoning

Anyway, thanks

I'll try and give you a better explanation, or at least get you a source, when I have more time. Ok to do that?

 

[Mad Indian]

I'll try and give you a better explanation, or at least get you a source, when I have more time. Ok to do that?

Please give sir, if possible

 

[pmaitra]

Related thread: http://defenceforumindia.com/forum/...s-why-mainstream-views-different-reality.html

 

[blank_quest]

I should add some more content from an economist's blog.It seems to me pretty awesome to read his content and he is in the House of Lords in UK.
-----------------------------------------------------------------------------------------------------------------------------------------------------
Yesterday in the House of Lords, I drew attention to three big Government mistakes which have stuck out over the past two and a half years:

The first was the belief that cutting down government spending would automatically produce recovery. I know the Government now claim that they never believed anything so simple or idiotic, but they did, and there is plenty of evidence to prove it.

The second has been the Chancellor's failure to distinguish between current and capital spending. This has made the deficit seem more dangerous than it was. The prime example of this blind spot was the £50 billion cut in capital spending.{Like in India FM keeps on ranting but keeps pouring out waiver plan for defaulting agriculture labors and this keeps pushing labor into more debt.Instead they should end the subsidies on Gold Market and Diamond Trade Houses--I have worked in mumbai diamond market and I know 99% of trade is done in black money. }

The third was the Chancellor's belief that without a severe fiscal contraction Britain would go the way of Greece: that is, interest rates would go through the roof. This was doubly wrong. First, with an independent central bank able to buy government debt in whatever quantities were needed there was never any chance of gilt yields rising to the levels experienced by Greece, Portugal, Ireland and Spain. Secondly, and perhaps even more importantly, a reduction in the cost of government borrowing is no guarantee of a reduction in the cost of commercial loans sufficient to offset the collapse of the private demand for loans.

Lord Newby, the Liberal Democrat Treasury spokesman in the Lords, responded to the third big mistake with a counterfactual:

I find it almost incredible to think that if the Government had not been seen to get the fiscal position under control, interest rates would not have gone up. Even if they had not gone up to the levels that they are at in Greece or Spain, a single percentage point increase in interest rates...costs mortgage holders in the UK an extra £12 billion a year.

But what has actually happened to mortgage rates? The figure below compares UK mortgage rates to bond yields.

Source: Bank of England

Over the last year, by the time the Government's austerity programme was in full force, both tracker and variable rate mortgages offered have gradually been rising in relation to falling bonds yields. As I have been saying for some time now, the benefits of low government borrowing rates are not being transferred to mortgage holders.

I also asked Lord Newby about the puzzle of productivity:

There is a puzzle, which is that unemployment has been static in the past few months, and even falling slightly, despite the fact that output is flat and the economically active population has increased by 550,000 over the past two years. You would therefore expect unemployment to have increased. Why has it not done so? That is the puzzle"¦part of the answer at least must be that productivity - that is, output per hour worked - has been falling. As the Guardian put it, "it now requires many more of us to labour away to churn out the reduced volume of stuff". Falling productivity is just as serious a problem for the economy as rising unemployment, and a greater problem in the longer term.

The Prime Minister claims that 900,000 extra jobs have been created in the private sector over the past two years. That is not of course the net increase in jobs, given that 400,000 jobs have been lost in the public sector. The net increase in jobs has been 500,000.

Can the Minister tell us how many of the net gains in employment are full-time? Labour market statistics suggest that more than half of them are part-time or self-employed.{every govt shows half-baked data's to make up situation look good}

The point is this: if a lot of the private sector job creation consists of part-time, low-skilled jobs at the bottom end of the service sector, it would explain the decline in productivity that limits the rise in unemployment. But it is a poor omen for that vibrant, high-value economy that is supposed to secure our future prosperity.
{just like here in India MGNREGA is creating jobs with almost no skill - or semi skilled - labor and value,thus under-utilizing the Human resource and hiding actual unemploment}
Lord Newby did not have the figures to hand, but he did have something to say about self-employment and part-time work:

There is a false assumption that working for oneself or working part time are somehow second-class things to do or things that people do not necessarily choose to do.

To this the answer is obvious. Some people do choose self-employment or part-time work. But this choice was available before the recession, and many people who are now self-employed or part-time chose not to take it. Only when the recession removed the opportunity for full-time work did they take these options. It is not that I think these options are second best; when they had the choice, people decided that they were second best. And if people didn't believe there was a market for their business when the economy was healthy, why should we assume that they are more confident now? The proportion of part-time workers who want, but cannot find, a full-time job has doubled since the crash, to 18% - that's 1.4 million who are under-employed. In the past two years alone this figure has gone up 4%. The statistics don't show how many people who are self-employed want a full-time job, but it is difficult to believe that there is not a similar trend.

The fact that self-employment has risen is a testament to the resilience of the British workforce, but it is not the sign of good economic policy – unless of course the recession is part of the government's plan to encourage small businesses.

As for today's quarterly figures, which show that Britain has "officially" come out of recession, I can only repeat what I said in the speech:

When an economy is crawling along the bottom, any small wave is likely to lift our spirits. Over the past three quarters - that is, the past nine months - the economy has shrunk by 1%. Even if, as now expected, it achieves a positive growth of about 0.8% this quarter, that still leaves it in roughly the same place as it was a year ago. Moreover if, as commentators suggest, this boost is due to the Olympics, it will be in the nature of a windfall. However much we may rejoice in the achievements of our athletes, 28 gold medals is not enough to turn the British economy around.

 

[panduranghari]

Well, if you're looking for a non-technical summary that's to-the-point, here's your answer:

On the other hand, a consistently low rate of inflation, as has been the case in most Western economies for many decades now, and a low expected rate of inflation has exactly the opposite effect with respect to technological change: it acts as a catalyst for technological growth in the long-run in an environment where markets are highly developed, slight product differentiation is essential, competition is largely technique- or marketability-based and a large number of competitors in the market exist.

The consistent low inflation in the west was due to the ability of the west to print and also give loans via IMF and WB. The inflation busting measures ensured the poor countries suffered. Since 1923 no hyperinflation episodes have happened in a western country. I do not consider Argentina as a western country though its in the western hemisphere.

The whole charade is up and now we are on the verge of a grand global hyperinflation on a epic scale. US dollar will tank like there is no tomorrow. you heard it here first.

 

[Rage]

The consistent low inflation in the west was due to the ability of the west to print and also give loans via IMF and WB. The inflation busting measures ensured the poor countries suffered. Since 1923 no hyperinflation episodes have happened in a western country. I do not consider Argentina as a western country though its in the western hemisphere.

The whole charade is up and now we are on the verge of a grand global hyperinflation on a epic scale. US dollar will tank like there is no tomorrow. you heard it here first.

Since this is a critical time for me, for want of time, I won't be able to get into a lengthy discussion. However, I will point out to two assumptions, simultaneous and parallel, you've made in your post: the first is one between quantitative easing and inflation: quantitative easing actually tends to lead to more inflation, in practice, not less - if this assumption is taken alone; the second is between disinflationary tendencies under a quantitative easing regime and international loan disbursement. This is one of the features or 'benefits' of a reserve currency. However, there is no historical information to suggest that disinflation has increased as loan disbursement has expanded, or vice versa. Nor is the expansion or contraction of the monetary base the key or only element in inflation: the velocity of money, which tells us how long people actually hold onto their money, also plays an important role. M2 (basic currency, M0 + checking a/c balances >>M1 + other readily convertible assets/accounts/time deposits, >>M2) which reflects not just the expansion or contraction of base money, but also how that effectively translates into actual money supply in circulation, is crucial. The third is that inflation is substantially a global phenomenon: and to this end, relative velocities of circulation [for eg. If domestic lending (and hence velocity) in the U.S. is rising partly because European lending (and velocity) is contracting, then some of the inflation potential is being sucked out, at least temporarily, by financial and credit strains in Europe] and relative currency values also play an important role.

Now, this is not talking about the inflation and disinflation of the dollar, or their trade-offs with growth or employment- which are purely short-run phenomenon, but the more-long run secular inflation and the ability to sustain the underlying strength of the U.S.D., over the long-term. Which is what I think you were referring to, in your correlation between disinflation and loan-disbursement. And I am of the view, and I think most economists will agree, that on a long enough time frame, the ability to sustain the USD as the global reserve currency is critically dependent upon the liquidity, in case of official reserves, and the network externalities, in the field of invoicing trade and denominating foreign debt, that surround the currency- which are dependent in turn upon the creation of sufficiently large or large-value real U.S. assets- whether at home or abroad. The case is, what that long-run time frame will be, and how the process of technological change- among a range of other critical factors- play out in the interval.

 

[Sakal Gharelu Ustad]

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:USA&dl=en&hl=en&q=us+gdp+growth+rate#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_defl_kd_zg&fdim_y=inflation_type:1&scale_y=lin&ind_y=false&rdim=region&idim=country:USA&ifdim=region&tstart=-255834000000&tend=343782000000&hl=en_US&dl=en&ind=false

http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_mktp_kd_zg&idim=country:USA&dl=en&hl=en&q=us+gdp+growth+rate#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_mktp_kd_zg&scale_y=lin&ind_y=false&rdim=region&idim=country:USA&ifdim=region&tstart=-255834000000&tend=343782000000&hl=en_US&dl=en&ind=false
@panduranghari

What you tried to convey through your graph is basically stagflation. And when I looked at it carefully, the 1970-1980s in the graph do not show any overlap between inflation and depression. I think whoever made the graph missed this point. Look at the two graphs that I posted and it would be much clearer that everyone now knows and takes into account that these two things can strike together.

This means the lines have already crossed each other in the history. I do not think that anyone in the Fed would commit such a mistake now and still believe that these two events do not overlap.

If you are interested in reading more: http://en.wikipedia.org/wiki/Stagflation

In economics, stagflation is a situation in which the inflation rate is high, the economic growth rate slows down, and unemployment remains steadily high. It raises a dilemma for economic policy since actions designed to lower inflation may exacerbate unemployment, and vice versa.

The portmanteau stagflation (of inflation and stagnation) is generally attributed to British politician Iain Macleod, who coined the phrase in his speech to Parliament in 1965.[1][2][3][4]

In the version of Keynesian macroeconomic theory which was dominant between the end of WWII and the late-1970s, inflation and recession were regarded as mutually exclusive, the relationship between the two being described by the Phillips curve. Stagflation is very costly and difficult to eradicate once it starts, in human terms as well as in budget deficits.

This also brought the death blow to the standard Philips curve talked about in another http://defenceforumindia.com/forum/...ents-deliberately-keep-unemployment-high.html

 

[pmaitra]

Since this is a critical time for me, for want of time, I won't be able to get into a lengthy discussion. However, I will point out to two assumptions, simultaneous and parallel, you've made in your post: the first is one between quantitative easing and inflation: quantitative easing actually tends to lead to more inflation, in practice, not less - if this assumption is taken alone; the second is between disinflationary tendencies under a quantitative easing regime and international loan disbursement. This is one of the features or 'benefits' of a reserve currency. However, there is no historical information to suggest that disinflation has increased as loan disbursement has expanded, or vice versa. Nor is the expansion or contraction of the monetary base the key or only element in inflation: the velocity of money, which tells us how long people actually hold onto their money, also plays an important role. M2 (basic currency, M0 + checking a/c balances >>M1 + other readily convertible assets/accounts/time deposits, >>M2) which reflects not just the expansion or contraction of base money, but also how that effectively translates into actual money supply in circulation, is crucial. The third is that inflation is substantially a global phenomenon: and to this end, relative velocities of circulation [for eg. If domestic lending (and hence velocity) in the U.S. is rising partly because European lending (and velocity) is contracting, then some of the inflation potential is being sucked out, at least temporarily, by financial and credit strains in Europe] and relative currency values also play an important role.

Now, this is not talking about the inflation and disinflation of the dollar, or their trade-offs with growth or employment- which are purely short-run phenomenon, but the more-long run secular inflation and the ability to sustain the underlying strength of the U.S.D., over the long-term. Which is what I think you were referring to, in your correlation between disinflation and loan-disbursement. And I am of the view, and I think most economists will agree, that on a long enough time frame, the ability to sustain the USD as the global reserve currency is critically dependent upon the liquidity, in case of official reserves, and the network externalities, in the field of invoicing trade and denominating foreign debt, that surround the currency- which are dependent in turn upon the creation of sufficiently large or large-value real U.S. assets- whether at home or abroad. The case is, what that long-run time frame will be, and how the process of technological change- among a range of other critical factors- play out in the interval.

Money is wealth, and wealth is money. If there is wealth created, money is created.

When you use the term money, I presume, you don't really mean money; you mean Fiat Currency (FC). You may also interpret FC as Fake Currency.

Now, when we talk about money, in the real sense, we have the Non Fiat Currency, or Real Currency (RC) backed by resources, precious metals, etc., and the FC, which is basically an inflated value against a much smaller tangible wealth to back it up (Fractional Lending).

When RC is created, each printed currency unit is assigned a fixed amount of resource(s), such as, but not limited to, Gold, Silver, etc.. When FC is created, it is created out of thin air, with no resource to back it up, or in some cases, it is backed up by pieces of paper (Government Bonds), which, in the case of the US, is money borrowed from people who are yet to be born (our future generations).

So, when QE happens, a lot of FC is created, but no tangible resource is added to the reserve, and adding pieces of paper, at least to me, means nothing (pieces of paper, as in Government Bonds).

So, when there is increase in FC supply, and no increase in production of goods, the market finds an equilibrium, whereby, goods cost more in terms of FC, but cost the same if computed if the currency were RC.

There is increased spending of FC, but no increased spending of RC, and hence, growth is nil.

This is where GDP comes into play. GDP is based on FC supply and FC velocity, and it is easy to manipulate it by printing more and more FC, and in the process, stimulate, or hope to stimulate, FC velocity. Now, even if there is no increase in FC velocity, the mere fact that more FC is printed, boosts the GDP, even if there is no increase in production of goods.

I will post an article that touches upon this matter.

 

[pmaitra]

The GDP Growth Deception, Central Bank Manipulated Fake Economic Statistics

Link: http://www.marketoracle.co.uk/Article32768.html

Barry M. Ferguson, RFC is President and founder of BMF Investments, Inc. - a fee-based Investment Advisor in Charlotte, NC. He manages several different portfolios that are designed to be market driven and actively managed. Barry shares his unique perspective through his irreverent and very popular newsletter, Barry's Bulls, authored the book, Navigating the Mind Fields of Investing Money, lectures on investing, and contributes investment articles to various professional publications. He is a member of the International Association of Registered Financial Consultants, the International Speakers Network, and was presented with the prestigious Cato Award for Distinguished Journalism in the Field of Financial Services in 2009.

© 2012 Copyright BMF Investments, Inc. - All Rights Reserved (this is why I did not post the entire article)
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.

 

[Rage]

@pmaitra,

I'll come back to your comment in a day or two.

 

[Rage]

Sorry about the late reply, @pmaitra.

To nitpick, money is not wealth. The two are distinct in economics, but often conflated in common parlance.

Wealth is the market value of an individual's assets, the net present value of all his assets (including income) discounted by the expected interest rate. Wealth is a stock, measurable at a unit price at a date in time.

Money can be any or a combo of: a medium of exchange; a unit of account; or a store of value. Money is simply one of the many assets in which wealth may be held.

In the language of Venn diagrams, money is a subset of wealth. Not all wealth may be used as money, but some of it can. The proceeds (income) from the sale of products from a vineyard (wealth) may constitute money, but the vineyard itself may not. Wealth may be tangible (real and financial assets) or intangible (goodwill, copyrights etc.) and may often be the source of money, or not. An African nation can have tremendous wealth at its disposal, but can still be poor.

To understand this distinction more in the context of financial markets, here's a small example:

Suppose there is an economy consisting of three people: Alice, Bill, and Charlie. Further suppose that there are only two forms of financial assets in this economy: keeping money in checking account balances at the bank, and holding shares of stock in the Acme Corporation. Initially our three people hold the following assets:

Starting Financial Assets of Community

Alice

$10,000 in checking


Bill

$5,000 in checking

500 Acme shares @ $10/share


Charlie

$5,000 in checking

500 Acme shares @ $10


Notice that in this initial configuration, everyone possesses $10,000 in financial wealth. Alice has $10,000 in her checking account, whereas Bill and Charlie have their wealth evenly divided between checking and shares of Acme. Further note that the total amount of financial wealth — at this moment — is $30,000, while the total amount of money is $20,000.

Now suppose that Bill realizes the current administration is staffed by Marxists and he thinks Acme's profitability will soon take a nosedive. Consequently he calls his broker and says, "I want to take my money out of stocks and put it into checking."

The broker dutifully places an order to liquidate Bill's entire portfolio at any price. This huge sell order — which, after all, is dumping half of Acme's outstanding shares — pushes down the price. When it hits $3 per share, Alice tells her broker to jump on the opportunity. After the trade is consummated, this is the configuration of the economy:

Ending Financial Assets of Community

Alice

$8,500 in checking

500 Acme shares @ $3/share


Bill

$6,500 in checking


Charlie

$5,000 in checking

500 Acme shares @ $3


We can make several observations about the transformation of this hypothetical community. First and most obvious, the total amount of money is the same: Although Bill increased his checking-account balance by $1,500, Alice decreased her balance by the same amount. Whenever someone sells stocks to raise cash, there must be someone on the other side of that transaction who is losing cash in order to acquire more stocks.

We can also note that while the total amount of money in the community stayed constant (at $20,000), the total amount of wealth decreased, from $30,000 down to $23,000. This loss of $7,000 can be decomposed into Bill's loss of $3,500 and Charlie's loss of $3,500, each on his stock portfolio.

Specifically, when Acme shares were priced at $10 each, Bill and Charlie each held "$5,000 worth" of stock. But when Bill dumped his entire holdings, this pushed the price down 70 percent, thereby pummeling the market value of Bill and Charlie's portfolios.

The total "market cap" in this economy dropped from $10,000 down to $3,000. (Remember there are 1,000 shares of Acme Corporation in the economy.) This $7,000 didn't "go" anywhere; it certainly didn't go into checking accounts. We can see this most clearly when considering Charlie's position: Charlie didn't do anything at all with his assets, yet his personal wealth dropped from $10,000 to $6,500. It's not that Alice or anybody else "took Charlie's money," it's simply that the market price of Acme fell by $7 per share.

Now, this tedious depiction of the difference between money and wealth serves an important purpose:

- You will find that, in practice, fiat currency, with inflationary and deflationary consequences of easing or tightening of the money supply respectively, is the de facto money in circulation and that what you call 'real currency' (RC) is simply wealth: the sum of tangible and intangible assets- "resources, precious metals, etc.", that bear the only "fixed" relation possible since the end of the era of the gold standard: 1:1. But it is not 'money' in itself, because it, as denoted above, does not determine the relative levels of prosperity between individuals (money to be used as a medium of exchange for goods, services).

- What you refer to as 'Fake Currency' or 'Fiat Currency (FC)' is in fact only one aspect of Money. When I refer to money in the context of inflation, quantitative easing and the velocity of money, I refer to M2: money and "close substitutes" for money- that most economists use when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions- currency, travellers' cheques, demand deposits and other chequable deposits, savings deposits, time deposits and institutional money market funds- all those assets (wealth) that are relatively liquid and have wide tradeability. Quantitative easing (printing "Fake Currency") will not in itself affect the quantity of wealth; it will simply change the way wealth is valued in terms of a unit of money.

- If 'real currency (RC)', in your parlance, is "a currency unit assigned a fixed amount of resource", then Quantitative easing can have no impact on the value of RC or itself cannot be affected by a change in 'RC' (wealth). In other words, Quantitative easing, understood as printing currency or expanding the monetary base: the fiat component of money supply- with an inflationary end result- should have no effect on real currency (wealth) or vice versa. Moreover, Quantitative Easing, by expanding the monetary base, hence the money supply, the Quantity theory of money will tell you that the velocity of money will tend to rise in the midst of inflationary expectations (people will tend to buy today instead of tomorrow because of the fear of loss of purchasing power of currency). However, if changes in wealth (real currency) vs income (nominal GDP- from the income side- proxied and inflated from QE) are important in determining the decline in U.S. money velocity since 1981, then: wealth must have risen relative to current income, during that period.

- Now the logic is this: Velocity relates the equilibrium level of income to the equilibrium quantity of money; the latter depends importantly on the quantity of money demanded. Momentarily ignoring other things that may influence people's choices, money demand theory states that the demand for money is proportionally related to some scale variable, either income or wealth. The transaction theory of money demand uses the flow of current income as the scale variable while the portfolio approach to money demand uses the stock of wealth.

- The transaction approach presumes that money is held to support current spending and that current spending is closely related to current income. This theory relates the demand for money (say MD) to current income (Y) by some proportion (k). In equilibrium, since the quantity of money demanded equals the quantity supplied (MD = MS = kY), the ratio of income to the quantity of money (income velocity of money) is equal to the inverse of this proportion (V = Y/MD = Y/kY = 1/k). If current income (Y) rises, desired spending rises in proportion; consequently, people will want more money to increase their spending (MD).

- The portfolio theory which is more relevant to our concerns about real currency (wealth) vs an inflated income (GNP) holds that the quantity of money balances people hold is related more closely to their wealth than their current income. Money is simply one of many assets in that mix. The desired mix of assets that comprise wealth depends on both the net benefits (returns) of holding wealth in various forms and risk preferences. The portfolio theory states that an increase in wealth is associated with an increase in the quantity of money people want to hold and vice versa. Again, ignoring other factors that may influence choices, this theory says that the demand for money is
a constant proportion (k) of wealth (W). In equilibrium, the quantity of money demanded is equal to quantity supplied; thus the ratio of wealth to money (wealth velocity of money) is equal to the inverse of this proportion (W/M = W/pW = 1/p).

- Both theories of money demand agree that certain variables, such as short-term interest rates, population, the pattern of receipts and payments, the technology of the payment system and risk preferences are important for money demand. They differ, however, in regard to the scale variable. If current income were always a constant proportion of wealth, there would be no substantive empirical difference between the two theories. In this case, k and p would differ by a constant factor that reflects the ratio of income to wealth (Y/W): [V = 1/k = Y/M = (W/M)(Y/W) = (1/p)(Y/W)]. If income is not a constant proportion of wealth, however, and if the portfolio theory of money demand is correct, income velocity
will fluctuate whenever current income changes relative to wealth. If current income rises relative to wealth, for example, the income velocity of money will also rise, ceterus paribus. The reverse movement in the income velocity of money would occur if wealth rises relative to current income. In other words, the velocity of money (the rate at which money leaves hands) will decline only if the growth in wealth ('real currency) outpaced the growth of nominal GNP (income- as subject to various inflating factors, including Quantitative Easing).

http://static.seekingalpha.com/uploads/2009/11/20/saupload_velocity_6.jpg
http://www.advisorperspectives.com/commentaries/images/m2-velocity_131179.jpg

- The above two graphs show that the U.S. MZM velocity (a measure of the liquid money supply within an economy) has witnessed a steep decline ever since 1981. This secular decline could only occur under the fulfillment of both these conditions: 1) the demand for money must be more closely related to wealth than to current income (that is, wealth is the appropriate scale variable); 2 wealth must have risen relative to current income since 1981. Various empirical estimates of three different proxies of national wealth: expected income (Ye), permanent income (Yp) and physical non-human wealth gathered from balance sheet data show that all three have risen relative to current income (Y) since 1981. In addition, the relationship bears a strong secular inverse relation: indicating that wealth creation ('real currency') did indeed outpace the growth of national income (GNP- as subject to inflationary pressures, including QE) since 1981.

http://www.econbrowser.com/archives/2011/12/cons_delev2.gif
http://www.peakprosperity.com/sites.../cceb55bd71a95cb52765ea398ba51ae5-557x377.jpg

- The final caveat I'd like to add is that, considering monetary base velocity is now lower than it was during the Great Depression, one is left to believe that it has no where to go but up. Theoretically velocity could continue to fall, especially considering that the monetary base has been expanding faster than GDP in recent times. If inflation does begin to rise sharply however, it can facilitate a rapid rise in velocity: the faster prices are rising, the faster people spend their money as they want to make their purchases before a higher expected future price comes into effect. This can decidedly snowball into a nasty scenario. But don't be fooled into thinking the Fed cares about this: inflation is paradoxically good for the Fed when used in conjunction with artificially suppressed rates as the combination of the two effectively ensures that the government can fund itself cheaply.