Capital consumption and the Destruction of Bank Capital (Fekete), followed by North

[gonegolfin]

Fekete discusses capital consumption and the destruction of bank capital ...

"Nobody bothered to investigate the question whether the symbiosis of the Fed and bond speculators (mostly banks) might somehow have a detrimental effect on the economy. It certainly looked like a brilliant scheme of creating positive value out of nothing -- nay, out of negative value! Nobody has raised the objection that there “ain’t no free lunch”, that in our world strict conservation laws govern and draw a line between what is possible and what is not. In particular, it is not possible to create value out of nothing. Any appearance to the contrary must involve the destruction of value somewhere else.

Indeed, creating bond values out of nothing has coincided with the destruction of capital. Capital consumption is an insidious process. It has no obvious symptoms. If anything, like narcotics, it has a euphoric effect on the economy. Its role is to desensitize the victim before picking his pockets. It may fatten the wage envelope, widen profit margins, jack up managerial compensation, but all that is charged to the capital account. As long as there is a capital account, that is. Trouble bursts on the economic scene when the bottom of the capital barrel has been scraped clean. Of course, by that time it is too late. Nothing can be done to stop the rot."

"An Unhappy New Year" by Antal E. Fekete. FSO Editorial 12/31/2008

Gary North's "Closet Keynesians Emerge" ...
Closet Keynesians Emerge by Gary North

Brian

 

[RodISHI]

I think they summed it up fairly well.

There will be no tabula rasa after Inauguration Day. Pigs will continue running Animal Farm, making monetary policy, until the fruit trees are picked bare of fruit, the barns are swept clean of grain, with nothing left in the cupboards or in the cookie jars.

 

[editec]

This economic meltdown DOES rather show us that BOND RISK ASSESSMENT isn't exactly the hard science we thought it was, doesn't it?

For those of you who still think economics is a SCIENCE (rather than an art) ... ask yourselves how it is that we keep having these business cycles, but our community of economics geniuses never seems to know they're going to happen until after the fact?

If economics was a SCIENCE, (like physics or chemistry) wouldn't every compentent economist be able to predict what's going to happen?

I belive that economists, can no more predict the future of the economy, than historians can predict the future of the world.

All we can do is look at conditions as they are today, and based on previous events, INTUIT what the probable outcomes are likely to be.

Per usual, I will point out that the economy we have today, is probably resulting from the conceit that we could abandon our concern for the wellbeing of middle class, just so long as the monied classes were making money ON PAPER.

This was the same conceit that our nation had pre 1929.

The working classes were suriving on debt then, farmers were going belly up then, but as long as the WALL STREET was thriving NOBODY cared what was happening on Main Street or down on the farms.

The power of compound interest coupled with the availability of easy credit, drives prices (of everything, including stocks!) up.

The working class, in order to keep going, starts borrowing.

They cannot work harder, so they MUST borrow to keep up with the rising prices.

Then sooner or later, the power of compounding interest means that far too many people can no longer borrow enough to keep the economy going.

And then the whole house of cards build on debt falls apart.

The rich, who had far too much a percentage of the overall wealth, lose all that extra dough in bubbles, and the people who SHOULD HAVE HAD THAT MONEY, the working class, can't do doodlesquat to revive the economy, because we've created a system which was DESIGNED TO KEEP THEM POOR.

Are we going to FIX this problem?

Hell no!

What we're going to do is reliquify the system, and them play it again, Sam.

We are going to continue telling ourselves that UNIONS are evil, because they create inflation, but we are ALSO going to tell ourselves that having a billionaire class which doesn't pay very much taxes, is a good thing.

We'll keep pushing more and more advantages to the SUPPLY SIDE, at the expense of the DEMAND SIDE.

Then the SUPPLE SIDE will end up with too much money, they';; start seeking higher returns for their investments in DEBT INSTRUMENTS (because investing in real productions won't pay as good a return), all that money will create BUBBLES, they'll pop, all that money will evaporate and the cycle will end in collapse.

I guess I'm going to keep pointing out that the wealthiest time in American history happened at the same time that the middle class also got the highest percentage of money overall.

When the standard of living is going down for most people, the economy is starting to falter.

When personal bnakruptsies are rising, the economy is about to collapse.

It doesn't matter how well wall street is doing, it really matters how Main street is doing.

The people, not the billionaries, ARE the economy.

 

[BaronVonBigmeat]

No matter how many times I read Dr. Fekete's stuff, I can't quite seem to grasp what he's saying, lol. I think you need a background in accounting or finance or something.

The closest I figure is, he blames our eroding manufacturing base on the unstable interest rates caused when Nixon cut our final ties to gold in 1971. Something about risk free bond speculation and phantom profits and...yeah I get confused.

This is interesting to me though because if it's true, then it's a much more serious side effect of purely fiat money than a little 2~3% per year inflation. Persistent inflation is just a stealth flat tax. It's annoying, but hopefully you get a small raise every year to deal with it. Industry shutting down altogether is a much more serious issue.

 

[Zoomie1980]

This economic meltdown DOES rather show us that BOND RISK ASSESSMENT isn't exactly the hard science we thought it was, doesn't it?

For those of you who still think economics is a SCIENCE (rather than an art) ... ask yourselves how it is that we keep having these business cycles, but our community of economics geniuses never seems to know they're going to happen until after the fact?

If economics was a SCIENCE, (like physics or chemistry) wouldn't every compentent economist be able to predict what's going to happen?

I belive that economists, can no more predict the future of the economy, than historians can predict the future of the world.

All we can do is look at conditions as they are today, and based on previous events, INTUIT what the probable outcomes are likely to be.

Per usual, I will point out that the economy we have today, is probably resulting from the conceit that we could abandon our concern for the wellbeing of middle class, just so long as the monied classes were making money ON PAPER.

This was the same conceit that our nation had pre 1929.

The working classes were suriving on debt then, farmers were going belly up then, but as long as the WALL STREET was thriving NOBODY cared what was happening on Main Street or down on the farms.

The power of compound interest coupled with the availability of easy credit, drives prices (of everything, including stocks!) up.

The working class, in order to keep going, starts borrowing.

They cannot work harder, so they MUST borrow to keep up with the rising prices.

Then sooner or later, the power of compounding interest means that far too many people can no longer borrow enough to keep the economy going.

And then the whole house of cards build on debt falls apart.

The rich, who had far too much a percentage of the overall wealth, lose all that extra dough in bubbles, and the people who SHOULD HAVE HAD THAT MONEY, the working class, can't do doodlesquat to revive the economy, because we've created a system which was DESIGNED TO KEEP THEM POOR.

Are we going to FIX this problem?

Hell no!

What we're going to do is reliquify the system, and them play it again, Sam.

We are going to continue telling ourselves that UNIONS are evil, because they create inflation, but we are ALSO going to tell ourselves that having a billionaire class which doesn't pay very much taxes, is a good thing.

We'll keep pushing more and more advantages to the SUPPLY SIDE, at the expense of the DEMAND SIDE.

Then the SUPPLE SIDE will end up with too much money, they';; start seeking higher returns for their investments in DEBT INSTRUMENTS (because investing in real productions won't pay as good a return), all that money will create BUBBLES, they'll pop, all that money will evaporate and the cycle will end in collapse.

I guess I'm going to keep pointing out that the wealthiest time in American history happened at the same time that the middle class also got the highest percentage of money overall.

When the standard of living is going down for most people, the economy is starting to falter.

When personal bnakruptsies are rising, the economy is about to collapse.

It doesn't matter how well wall street is doing, it really matters how Main street is doing.

The people, not the billionaries, ARE the economy.

Economics is applied human psychology. Nothing more