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Thread: Empirical proof of the limits of monetary expansion and debt creation on the real economy

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    Politics.ie Member stopdoingstuff's Avatar
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    Default Empirical proof of the limits of monetary expansion and debt creation on the real economy



    Simple and elegant- the more debt, the smaller the impact of every marginal unit of debt on the real economy. Isn't it time to liquidate the debt and activate the key strength of the market economy- that those who lose get wiped away so that capital is reinvested productively- rather than propping up the losers at the expense of our ability to invent a new future? For me the picture sums it up so well and I don't want to rant. Therefore, I hand it over to you. Discuss.
    Faoi mhóid bheith saor

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    Quote Originally Posted by stopdoingstuff View Post


    Simple and elegant- the more debt, the smaller the impact of every marginal unit of debt on the real economy. Isn't it time to liquidate the debt and activate the key strength of the market economy- that those who lose get wiped away so that capital is reinvested productively- rather than propping up the losers at the expense of our ability to invent a new future? For me the picture sums it up so well and I don't want to rant. Therefore, I hand it over to you. Discuss.
    what would liquidating debts mean :
    - people with mortgage difficulty have houses repossesed, evicted, are out on the street ?
    - property developers who borrowed massively have their debts wiped, so are free to continue their lives, do so again ?
    - banks who have their debt assets wiped our are at severe capital loss, perhaps to point of liquidation

    then what would the knock on effects of this be :
    - people on the streets try to rent ? massive pressure on rental sector, homelessness surges, people cant work effectively because they have no house in which to keep clean clothes, have showers, tidy away the laptop, whatever
    - banks cant lend for new house financing / expansion as either bankrupt or in severe capital crisis
    - consumption across the economy goes through the floor, more businesses go bankrupt, more unemployment
    - public services and social welfare become unsustainable

    Maybe this is a worst case scenario but lets think this through

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    Politics.ie Member stopdoingstuff's Avatar
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    Quote Originally Posted by dancl2000 View Post
    what would liquidating debts mean :
    - people with mortgage difficulty have houses repossesed, evicted, are out on the street ?
    - property developers who borrowed massively have their debts wiped, so are free to continue their lives, do so again ?
    - banks who have their debt assets wiped our are at severe capital loss, perhaps to point of liquidation

    then what would the knock on effects of this be :
    - people on the streets try to rent ? massive pressure on rental sector, homelessness surges, people cant work effectively because they have no house in which to keep clean clothes, have showers, tidy away the laptop, whatever
    - banks cant lend for new house financing / expansion as either bankrupt or in severe capital crisis
    - consumption across the economy goes through the floor, more businesses go bankrupt, more unemployment
    - public services and social welfare become unsustainable

    Maybe this is a worst case scenario but lets think this through
    None of the above- there are plenty of ways to go about. People in Iceland had their debts written down to 110% the value of the equity in their home, loans can be restructured, and unaffordable mortgages on family homes can be transformed into long term rentals with the option to buy with a convenient accounting valuation fiction to avoid the need for recapitalization. The developers need not be spared- they are de facto bankrupt so cut them loose and sell their assets. The banks can be sold off or restructured- banks are not special.

    The knockon effects are preciesly what we have been going through for the last 5 years- if we had wound things up earlier we would be out of this by now. AS it stands, the country is full of vacant properties, so rentals would not be a problem. As it stands the banks can't lend now because they are zombie banks. Consumption went through the floor years ago- it is hard to consume if over half of ones earnings goes to interest and taxes. Public spending and welfare are already unsustainable- thats why debt/gdp is approaching 120%, and every new unit of debt produces less marginal GDP growth. In short, we are taking the Japanese route.

    But this is bigger than Ireland- the chart relates to the USA. Leaving aside the official debt figures, the net present value of the US government's unfunded liabilities is over 70 trillion dollars, Germany has 5 trillion Euros of hidden debt, and China could already be approaching Western levels of debt before we account for their unfunded liabilities and their Local Government Finance Vehicles. All of this also does not take into account the coming demographic decline.

    If we take the above chart and we take the example of Japan, the message is clear- the limits of an economy run on debt and monetary expansion rather than on equity financing, capital formation and productivity gains are becoming impossible to ignore, and the mathematics of the situation cannot be denied. If you create one unit of debt to produce 0.2 units of growth, you get a marginal debt to GDP ratio of 500%. Therefore something has got to give.
    Faoi mhóid bheith saor

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    Yes but inflation is the only thing that will save the Euro and the US economies and that is the aim of the FED and the ECB. Print, print, print until prices start to move and then fuel it by opening credit to the plebs.

    And another game of musical chairs/hot potato will begin as planned.

    Japan is hoping to benefit from being the first nation to seriously devalue its currency to kickstart a stagnated economy.
    It may well work but it has consequences for the rest of the global currencies.
    Fianna Fail - The Anti Democratic Party & The Anti Constitutional Party. Traitors of Irishmen and Irishwomen.

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    Quote Originally Posted by stopdoingstuff View Post
    None of the above- there are plenty of ways to go about. People in Iceland had their debts written down to 110% the value of the equity in their home, loans can be restructured, and unaffordable mortgages on family homes can be transformed into long term rentals with the option to buy with a convenient accounting valuation fiction to avoid the need for recapitalization. The developers need not be spared- they are de facto bankrupt so cut them loose and sell their assets. The banks can be sold off or restructured- banks are not special.

    The knockon effects are preciesly what we have been going through for the last 5 years- if we had wound things up earlier we would be out of this by now. AS it stands, the country is full of vacant properties, so rentals would not be a problem. As it stands the banks can't lend now because they are zombie banks. Consumption went through the floor years ago- it is hard to consume if over half of ones earnings goes to interest and taxes. Public spending and welfare are already unsustainable- thats why debt/gdp is approaching 120%, and every new unit of debt produces less marginal GDP growth. In short, we are taking the Japanese route.

    But this is bigger than Ireland- the chart relates to the USA. Leaving aside the official debt figures, the net present value of the US government's unfunded liabilities is over 70 trillion dollars, Germany has 5 trillion Euros of hidden debt, and China could already be approaching Western levels of debt before we account for their unfunded liabilities and their Local Government Finance Vehicles. All of this also does not take into account the coming demographic decline.

    If we take the above chart and we take the example of Japan, the message is clear- the limits of an economy run on debt and monetary expansion rather than on equity financing, capital formation and productivity gains are becoming impossible to ignore, and the mathematics of the situation cannot be denied. If you create one unit of debt to produce 0.2 units of growth, you get a marginal debt to GDP ratio of 500%. Therefore something has got to give.
    right, for sure there's an argument to be made.. and getting debt down is essential, and it has to be done the right way. what you're saying could be a good way. the iceland example doesnt really hold up though, it's a population of 300,000 people whereas ireland is 4.5m. i'm not sure what meaningful comparison can be held out here.

    maybe things wont be simple, what about the working man, wife and kids who borrowed money to speculate on property development ? fair few of them around, do we bankrupt them and take the family home ? or what about the big car loans and credit card debt ?

    probably there's two paths to getting things going, one which keeps us in europe which is going to be slow and conservative, more-or-less what's happening at the moment. i'm all for doing everything to improve the situation while keeping the support of europe. unfortunately this means going slowly because it takes time for the ecb and more conservative countries to come around to solutions which are getting results in other parts of the world.

    the other option is unilateral action that costs us the support of europe. anyone claiming certainty as to how that would work out is either very very clever or ignorant of the limits of their knowledge. just because things are bad doesnt mean that they'd be better after ill thought through action.

    whatever we do, those whose standard of living expectations are still tuned to 2006 will be disappointed and as far as i can tell that's a significant number of people.

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    Politics.ie Member Big Brother's Avatar
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    Quote Originally Posted by stopdoingstuff View Post


    Simple and elegant- the more debt, the smaller the impact of every marginal unit of debt on the real economy. Isn't it time to liquidate the debt and activate the key strength of the market economy- that those who lose get wiped away so that capital is reinvested productively- rather than propping up the losers at the expense of our ability to invent a new future? For me the picture sums it up so well and I don't want to rant. Therefore, I hand it over to you. Discuss.

    Beautiful chart.

    Says it all.

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    Is that chart just another diagram that indicates how ponzi schemes don't work forever ?

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    Politics.ie Member seabhcan's Avatar
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    Quote Originally Posted by stopdoingstuff View Post
    Isn't it time to liquidate the debt and activate the key strength of the market economy
    Pension funds? Most debt today, one way or another, is owed to pension funds. We work to benefit those who no longer work.

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    But if we hadn't taken on more debt then would we have had any growth at all?
    Once your ability to function within society depends on a government controlled ID card then you are no longer a free citizen.

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    Politics.ie Member seabhcan's Avatar
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    Quote Originally Posted by Mad as Fish View Post
    But if we hadn't taken on more debt then would we have had any growth at all?
    Its equally possible that the growth and the debt are coincidental and one did not cause the other.

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