Tuesday, May 25, 2010

The pernicous stupidity of Financial Times

Financial Times claims that Germany's banking sector is insolvent.

Reading stories like this absolutely astound me. The trash on the books of the German banks is worth exactly as much as it has ever been worth -- i.e., not much. All that can be really said about it is that the fact that the trash has to someday be written down to its real value will be seriously annoying to whoever owns the trash at the time -- which likely is *not* going to be the German banks, but is almost 99.9% certain to be the European Central Bank (ECB).

Yes, this means the ECB will show paper losses on their equivalent of the Federal Reserve's "cash for trash" thingy. So what? The money lost never existed in the first place, until printed by the ECB in order to exchange for trash. Easy come, easy go.

For those cretins who claim, "but printing all this money will create inflation!" -- err, no. The money "exists" on the books today (in the form of the artificial values of the trash on the banks' books). You aren't "printing" money by exchanging cash for trash, you're simply changing money from one form into another, since you're silently un-printing the newly printed money when you write down the trash. The end result has no (zero) effect upon inflation, because there isn't a single Euro on bank balance sheets that wasn't already there even if just fictionally as artificially high values on trash.

Indeed, the only thing that trash-for-cash does is prevent *DEFLATION*, since banks writing down the trash is the same thing as un-printing money insofar as effect upon their balance sheets is concerned. Printing money to make up for the un-printed money is just status quo. So why do we continue to get stories like this from the likes of the Financial Times, and from conservative finance writers in general? It's as if the invention of the printing press in 1450 completely escaped their notice, nevermind the invention of computers by Alan Turing and John Von Neumann, which made printing money even easier because it doesn't even require paper anymore!

-- Badtux the Baffled-by-stupidity Penguin


  1. The pernicious stupidity isn't an accident or simply wron-headed journalism. It has a purpose, which is to prepare the public/cheerlead for the not-actually-necessary austerity cuts on the near horizon. But you already knew that.

    So does the same principle apply in the US? Did we not actually give $13 trillion or whatever to those criminal bankers who should be drawn & quartered (and I don't mean figuratively?) Or did we just exchange money that doesn't exist for money that never existed? Because it feels like we gave a whole lotta undeserved real cash to those clowns.

    Try as I might (and I do try,) I usually fail to understand economics, which is why I read blog like yours.

  2. did we just exchange money that doesn't exist for money that never existed -- got it in one ;). The Fed's trash for cash thingy ("quantitative easing") basically just moves the deflationary event (writing down these "assets") to the Fed's books, where it is a "who cares?" thing. Note that the toxic assets were cash equivalents as far as bank balance sheets were concerned, so basically it was a 1-1 exchange of cash for cash as far as the economy was concerned (i.e., *not* an inflationary event). Which is why the people shouting about how we're about to have inflation astound me -- you can't have inflation unless you print money, and the amount of money that the Fed has actually printed (as vs. done a 1-1 exchange of trash for cash) has been fairly minimal, indeed, not enough to offset the increase in the reserve ratios maintained by banks... the only reason we haven't fallen into outright deflation is that while the actual money supply has fallen, so has economic output, so the money/output ratio has remained stable. But it wouldn't take much to send the economy into an outright deflationary spiral... which would be bad for so many reasons I've previously mentioned here.

    -- Badtux the Economics Penguin

  3. I think deflation is inevitable at this point. B Hoover Obama's too little, too late stimulus is done, with no hope for a part 2. The question is: will it be Japanese style long term stagnation, or Great Depression, Pt 2.

    I really expect the latter. The first G.D. was in the context of world wide deflation. Japan's lost decade (or is it now 2 decades ?) wasn't. At last not for the first several years.

    Clamping down in Europe is flat out deflationary. There is nothing inflationary happening anywhere, as far as I know.

    I think the recovery over the last 14 months - as anemic as it has been - is no more than a counter current blip in a long term decline. If a blip lasts over a year, the trend one level higher is looong, indeed.

    This is not a bad time to be lining on a fixed income. Everybody else is screwed.


  4. After '29, it was a decade of depression, followed by a decade of war and ruin.

    The thing I've always wondered - and there has to be a good answer - is how did Germany, after the financial rubble of the Weimar Republic get on a financial footing - during the god damned depression - to finance the Wehrmacht?

    JzB the WTF? trombonist

  5. Jazz, your problem is that you think Hitler financed the Wehrmacht with real money. He didn't. He printed it then used it to mobilize the immobile resources that already existed in the German Republic, i.e., fiscal stimulus on a large scale. In fact, the Republican Party was great admirers of Hitler, saying "See? That's how you get a nation out of the Great Depression!". Thus Prescott Bush helping Hitler finance the imports he needed for modernizing the German military.

    One thing that some people are confused about is the quality of German arms at the beginning of WW2. German tanks and planes were actually technically inferior to those of the French, British, and Soviets, and their submarines were not as good as the then-current American and Japanese submarines. What Germany had was a) training -- their people knew how to use their weapons, had been drilled to a fare-the-well, could get off two rounds in the time that a gunner in a Soviet tank got off one round, and b) DOCTRINE -- they knew how to do combined-arms operations where infantry, armor, and air power all contributed.

    In short: Germany won the early battles of WW2 because they knew how to use their weapons, not because they had better weapons or more weapons. Indeed, Germany never did create a large heavy bomber like the 1935-vintage B-17 bomber or a long-range fighter like the 1940-vintage P-51 Mustang, both of which made a major contribution to keeping Germany from completely mobilizing Europe's industrial infrastructure to be able to outproduce the Allies... if Germany had ever developed the equivalent of the B-17 and P-51, they could have truly bombed Britain into submission. But they never did.

    - Badtux the War Penguin

  6. Yeah, but don't forget the awesome V1 and V2 rockets, not to mention their totally badass prototype jet fighter!

    Which were all, uh, a tremendous drain on their resources while having exactly zero effect on the outcome of war.

  7. ". . . so basically it was a 1-1 exchange of cash for cash as far as the economy was concerned (i.e., *not* an inflationary event)."

    Wouldn't a 1:1 cash-for-cash exchange cancel out, 'Tux? If so, then cash on either side need not have existed in the first place (neither side wins, neither side loses, both sides stay the same relative to the other). If debt can be wiped out so easily by simply trading dollar for dollar, wouldn't it be even more efficient, in terms of the economy, to do away with money altogether, thus eliminating a major economic stumbling block for millions of people?

  8. You are correct that a 1-1 exchange did not produce any change in the fundamental economic conditions. As for the notion that this means we don't need money -- not so fast, Phil. Money as a token of exchange is how we solve the intermediaries problem. Modern technological society has a huge number of intermediaries between the raw materials that come out of the grounds and the final sophisticated computer device that you obtain from your local Best Buy. A typical computer involves integrating the work of thousands of people into one device that you then buy for $500. How do each of these intermediaries know how much "stuff" to produce so that there's not too much Widget X produced and not enough Widget Y produced in order to get a computer out of the process? The answer is that the economy gets "trained" via tokens -- money -- to produce what's needed in order to get that computer to your local Best Buy. All attempts to directly plan economies have foundered on the intermediaries problem. Thus far, training economies via tokens to properly allocate resources such that we don't get too much of one thing and not enough of another needed to produce the final product -- a system which I'll call "mercantilism" to distinguish it from "capitalism" which goes one step further -- is the best solution we've devised for the intermediaries problem.

    In other words, in a properly functioning economy, the job of money is to keep goods and services flowing at optimum capacity through the system, with minimal excesses or shortages because excesses cause prices to go down (thus signalling to quit producing so much of commodity X) and shortages cause prices to go up (thus signalling to produce more of commodity Y). Insofar as money is still useful for this purpose, we can't do without it. What we *can* do, however, is that when money is *not* being useful either because of its form or because of where it is, we can acknowledge that fact and quietly change the form of the money, tax it and redistribute it, or otherwise handle the case where money isn't doing the job it's supposed to do (which is to lubricate commerce).

    In short, money is the lubricant of commerce. That's its whole point of being. Which is why deflation is such a drag, because deflation turns money into lumpy mattress stuffing instead -- and economies that devolve to barter simply don't work as well as economies that have money, because they can't come up with any reasonable solution to the intermediaries problem.

    - Badtux the Economics Penguin

  9. There goes my romantic vision of communism then.

    I've always wanted to be an armchair marxist, and now I cant, thanks to you.

    Bad, Bad Tux.

  10. But note the corollary to my "money is the lubricant of commerce" statement, which is that for things that *don't* involve a multitude of intermediaries, that involve a public good, and where the quantities are well known beforehand -- such as, say, health care and education -- we can just go ahead and do it. This hybrid social democracy is the norm in civilized countries, there is not one nation on the planet that outperforms the U.S. educationally with private schools. Similarly, every country that outperforms the U.S. in health care (and the U.S. is way down the list on the various statistics) does so with (gasp) SOCIALIZED MEDICINE. Horrors! In these cases, money is basically used to allocate how much of the economy shall be used to provide these services, rather than as a lubricant for services. Though the teachers and doctors and etc. who receive the money certainly want it, since it can then be traded for other goods and services, so money is still important here -- just not as important as for general commerce.

    So while your Marxist dream shall remain just that, a pipe dream (even modern computer technology swiftly runs out of steam trying to solve the intermediaries problem -- the modern economy is so complex it sends even the largest computers into meltdowns trying to simulate it), you can sooth yourself at least with the notion that socialism in a mixed economy is a viable thing, as Norway proves (Norway has more millionaires per capita than the USA, while having all those eeeeevil social services that the whining righties claim are unsustainable).

    - Badtux the Verbose Non-Marxist Socialist Capitalist Penguin


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