A Cross of Rubber
By PAUL KRUGMAN
Published: January 30, 2011
Last Saturday, reported The Financial Times, some of the world’s most powerful financial executives were going to hold a private meeting with finance ministers in Davos, the site of the World Economic Forum. The principal demand of the executives, the newspaper suggested, would be that governments “stop banker-bashing.” Apparently bailing bankers out after they precipitated the worst slump since the Great Depression isn’t enough — politicians have to stop hurting their feelings, too.
But the bankers also had a more substantive demand: they want higher interest rates, despite the persistence of very high unemployment in the United States and Europe, because they say that low rates are feeding inflation. And what worries me is the possibility that policy makers might actually take their advice.
To understand the issues, you need to know that we’re in the midst of what the International Monetary Fund calls a “two speed” recovery, in which some countries are speeding ahead, but others — including the United States — have yet to get out of first gear.
The U.S. economy fell into recession at the end of 2007; the rest of the world followed a few months later. And advanced nations — the United States, Europe, Japan — have barely begun to recover. It’s true that these economies have been growing since the summer of 2009, but the growth has been too slow to produce large numbers of jobs. To raise interest rates under these conditions would be to undermine any chance of doing better; it would mean, in effect, accepting mass unemployment as a permanent fact of life. moreBecause, don't you know, high prices are always the problem of cheap money--and the "answer" for the nut jobs is always a return to the Gold Standard. So it is probably time to remember that famous smart guys, like Al Einstein, though the Gold Standard was a BAD idea.
FLASHBACK: Albert Einstein Identifies The Inherent Flaw Of The Gold Standard
Cullen Roche, Pragmatic Capitalism | Jan. 24, 2011, 7:21 PM
I’ve discussed this before, however, it carries more weight when described by a man of Einstein’s stature. The one primary flaw in the gold standard was very similar to what we are seeing in Europe today. Because nations were required to have specific amounts of gold there was generally an imbalance in the global economy due to trade imbalances. Trade surplus nations were hoarders of gold while trade deficit nations were generally in shortage. If you were unable to mine or obtain the gold thru other measures your trade deficit put you at a persistent and inherent risk of recession without a reasonable ability to defend your citizenry from depression. Einstein described the inherent weakness in this monetary system:
“The gold standard has, in my opinion, the serious disadvantage that a shortage in the supply of gold automatically leads to a contraction of credit and also of the amount of currency in circulation, to which contraction prices and wages cannot adjust themselves sufficiently quickly.” moreAnd just a quick reminder--Einstein may have labeled himself a Socialist but he quotes Veblen--who wasn't much of a Socialist at all.
by Albert Einstein
This essay was originally published in the first issue of Monthly Review (May 1949).
Is it advisable for one who is not an expert on economic and social issues to express views on the subject of socialism? I believe for a number of reasons that it is.
Let us first consider the question from the point of view of scientific knowledge. It might appear that there are no essential methodological differences between astronomy and economics: scientists in both fields attempt to discover laws of general acceptability for a circumscribed group of phenomena in order to make the interconnection of these phenomena as clearly understandable as possible. But in reality such methodological differences do exist. The discovery of general laws in the field of economics is made difficult by the circumstance that observed economic phenomena are often affected by many factors which are very hard to evaluate separately. In addition, the experience which has accumulated since the beginning of the so-called civilized period of human history has—as is well known—been largely influenced and limited by causes which are by no means exclusively economic in nature. For example, most of the major states of history owed their existence to conquest. The conquering peoples established themselves, legally and economically, as the privileged class of the conquered country. They seized for themselves a monopoly of the land ownership and appointed a priesthood from among their own ranks. The priests, in control of education, made the class division of society into a permanent institution and created a system of values by which the people were thenceforth, to a large extent unconsciously, guided in their social behavior.
But historic tradition is, so to speak, of yesterday; nowhere have we really overcome what Thorstein Veblen called "the predatory phase" of human development. The observable economic facts belong to that phase and even such laws as we can derive from them are not applicable to other phases. Since the real purpose of socialism is precisely to overcome and advance beyond the predatory phase of human development, economic science in its present state can throw little light on the socialist society of the future. moreA reminder of how disastrous high interest rates can be. Some of the arguments included below are literally 100s of years old.
Why the rich get richer and poor get poorer
Mon Jan 03, 2011 at 11:42:05 AM CST
It's probably the oldest question in capitalism.
Make no mistake, there are a myriad of reasons why the rich get richer and the poor get poorer, and only a few apply to any one instance. That doesn't prevent generalization from being made. The defenders of the status quo explain it as thus:
The rich get richer and the poor get poorer because the rich learn to become stewards of the talents given to them. The poor have squandered their talents and are not given more.
Clean and simple. The poor are poor because they've brought it upon themselves. The rich are just better than you. Case closed. It's a very convenient philosophy if you're rich.
In reality there is only one reason for the growing wealth disparity that applies to practically every instance, and it isn't because one group is better, or smarter, or more amoral than another group.
It's not a hidden secret. Everyone is aware of it, but few understand it as well as they think they do.
"The most powerful force in the universe is compound interest"
- Albert Einstein
There is a famous allegory about the Persian emperor who was so pleased with a new game called chess that he offered the inventor a modest reward for his idea. The nameless inventor knew something about math, so he asked for a grain of rice for the first square, twice as much for the second square, and doubling again for each square until all 64 squares had been accounted for.
The emperor quickly agreed. On the 8th day the inventor collected 128 grains of rice. On the 16th he brought home 32,768 grains of rice. By the time half of the chessboard was accounted for the emperor was in debtor's prison because he defaulted on his debt to the inventor.
A similar analogy would be that one penny invested at 4% interest at the birth of Christ would buy a ball of gold 8,190 times the weight of the Earth in 1990.
The point is that compound interest is an extremely powerful thing. In a society that is heavily in debt, like ours is today, it is the most important force in the economy.
It also shows the mathematical impossibility of ever increasing borrowing with compounding interest. The solution that governments and the corporate media try to sell us is of exponential economic growth - another impossibility on a finite planet. This contradiction has led to innumerable wars and revolutions in our past.
"It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so." - Mark Twain
It always amazed and confused me how everyone in America is obsessed with their credit rating. It's almost as if people don't realize that credit equals debt. Debt is something that people have feared for thousands of years, because unlike Americans today, historically debt was always associated with another scary term - slavery.
Debt bondage, indentured servitude, slavery, they all mean the same thing. Yet somehow the establishment has convinced us that the ability to "manage" our slavery is something to be proud of. They even have a rating system for it.
If people really understood how compounding interest worked - something you were supposed to have learned in 7th grade Algebra - people would care a lot less about their credit ratings and would avoid debt altogether.
What is money?
Like interest, money is a subject that everyone thinks they know about, but very few actually do. This ignorance of the monetary system caused famous industrialist Henry Ford to once say:
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning."
What would cause him to say such a thing? A former Federal Reserve member can explain it better than I.
If all bank loans were paid, no one would have a bank deposit, and there would not be a dollar of currency in circulation. This is a staggering thought. We are completely dependent on the commercial banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the banks create ample synthetic money, we are prosperous; if not, we starve. We are absolutely without a permanent monetary system. When one gets a complete grasp upon the picture, the tragic absurdity of our hopeless position is almost incredible-but there it is. It (the banking problem) is the most important subject intelligent persons can investigate and reflect upon. It is so important that our present civilization may collapse unless it is widely understood and the defects remedied very soon.
- Robert Hemphill, for 8 years credit manager of the Federal Reserve Bank of Atlanta. January 24, 1939
The enormity of Hemphill's epiphany is so significant that I'm not surprised that the majority of the public refuse to accept it. "We are absolutely without a permanent monetary system." That means that the world monetary system will eventually fail all by itself because that is the way it is structured.
Why would it fail? Because of debt levels must increase exponentially in order to grow the economy. A growing economy requires more money, and money is debt. Exponential debt levels are mathematically impossible after a certain point. This isn't konspiracy theory or blind conjecture - it's Algebra 1.
This is the burden that we all carry because we use a debt-based monetary system rather than an asset-based monetary system, like the U.S. Constitution intended. moreI have been working on some video material on the subject of usury. The work in progress can be found here. (quicktime) (wmv)