Thursday, August 6, 2009

Economy for economists?

I was going to name this post ”economy for dummies” but that would be offensive towards dummies. Instead I choose to offer a bit of a guide to people that do not work at central banks, do not have an MBA in finance or has any kind of education in economy. This is mainly from a lecture I held a couple of years ago that I found on an old disc but it still holds its ground since nothing has changed. It is very basic in order for finance ministers and such to understand.

I do not mention M1, M2, M3 and I do not count or show mathematical conclusion, because it is not necessary. The basic rules are what they are and reality does not change. And please remember, almost all of this, except for some comments and the final part, was written and said about 6 years ago. No one predicted this crisis eh..?


There are really only 3 things you need to know about economy, the first two is very easy, the third one a bit trickier. These three things lead to a conclusion about a fourth one and that in turn leads to a 100% accurate prediction about the future.

First: Borrowing and interest rates
This has a very simple ground structure. Low interest rates equals more loans taken since it is cheaper to borrow. High interest rates mean less borrowing because it is more expensive to loan money. This also affects savings in the way that high interest rates mean you earn more money having money saved. Low interest rates mean you won’t save money because you do not earn anything from it. Also; higher rates and consequently savings mean that money is available for investments i.e. future gains. In turn; lower interest rates means more spending right now.

High interest rates = High savings, less borrowing = Higher investment rate

Low Interest rates = Low savings, much borrowing = Higher spending rate

Secondly: 1+1=2
Some economists say: “There is no such thing as a free lunch” or something like: “You cannot get something for nothing”. But even if most economists do agree on sentences like these, almost none of them truly understand the ramifications. Or to put it in other words; in the world of economists 1+1=4,9

Since 1+1=2 and $1=$1 it means that there is actually very little one can do outside the specific monetary circle you live in. Borrowing aside you can only spend the amount that you make. But most people and companies do not spend everything, they save some as a buffer. You know this yourself. If you only have $100 you will probably spend around $95 and save $5 to buy milk and bread later if necessary. If you have a bit more income or many hundreds, you might even put away some money so you can afford to buy a new TV or save to buy a new car in the future. Of course this behaviour partially change when we factor in borrowing, but the basic principle is clear, you cannot spend more than you have earned. This goes for you as an individual, it is true for every company and it is also true for the state.

Thirdly: Money
This is a long one, but size does matter so please read…

What is the difference between a $100 note and a piece of paper? The answer is; hardly anything. The piece of paper might be easier to write on and the dollar note might be shinier, otherwise, nothing. So why do we accept the dollar note as “value” hence can buy stuff for it? And why can’t we use any ordinary piece of paper? The answer is that the government put its muscles and its good word behind the dollar bill and back it up as “their” paper (at the same time outlawing any competitor). It does not matter what the notes are called or even what numbers and such there is on ‘em. What matters is how good the word of the particular government really is. The richer a country is and sounder the financial structure is, the more reliable a government is and the bigger and better a particular country is, the more power is backing a particular note.

Money is used as an exchange good so instead of us going around exchanging chairs for books or hand in our virgin daughter in exchange for a car, we use money. Money makes trade easier and it is easier to transport then people or construction material. This is the main reason for people to except money; we know it is necessary for any form of economy.

But since money doesn’t hold any real value it has to be correlated to something. As mentioned above, “the good word of the state” hangs on the wealth and soundness within the economy i.e. the amount of value being produced. The more value a certain economy produce, the more power you can put behind the money. However, if the number of notes in the economy shrinks in correlation to what we produced i.e. when there isn’t enough money in the system to buy “all” products; it leads to an overabundant of goods on the market and since we have produced more than the number of dollar notes each note grows in value and this means lower prices or/and deflation. Today’s economists claim this is the worst thing that can happen since, as they claim, the economy will dip down repeatedly until we either produce less or print more money.
The other thing that we can do with the money supply is that we print more money than the actual value. This means we get more money in correlation to what we produce and when this happens money looses in value and prices goes up. This is what is known as inflation. Most economist, again, agree upon that a little bit of inflation is better then deflation and consequently they mean that if the inflation rate is about between 1,5-4.5% it is a good thing. Hence they argue for, and the government agrees, that we should print more money than the actual value of what we produce just to keep the shopping spree going and keeping the economy from contracting.

Are u with me so far? Because now the first fun thing about this story comes:

The combination of the only 3 things you need to know about the economy
Government need to abide the same absolute laws as anyone else, hence cannot spend more then they have. BUT; politicians want to get re-elected and they want to behave like and be remembered by their constituencies as “heroes of the people” and as; “a good progressive champion for everyone’s equal rights” or their favourite one: “Saviour of the poor” and this they accomplished mainly by making everyone happy. And how do you make people happy? You give them stuff!

The government, however, is also limited by taxation and their income. They cannot tax us to much, even week feeble pussies like Britons or Swedes will rebel when pushed over the limit so there is a maximum income for the government. How can they fix that? By borrowing! The government goes to a neighbouring state, some companies or even their own people and says: “hey, here is some bonds, wanna buy?”. And normally this is not a problem; governments can sell many bonds since there is an abundant of tax-payer money backing it up. But what are they really selling? They are selling debt and in reality debt in money. The government promise to repay the lender with their money (not the value, please remember this). But also, even here there is a limit. Partly because there is just so much actual value that is shown by the amount of money and governments need to show - as any loan taker do - that they actually can, and will, pay the loans back. Partly they cannot borrow as much as they want because the repayments eventually get higher then the actual loans. So here we have dilemma, but as with any dilemma, the government has a solution: The printing machine!

In older times the printing machine was an actual physical printing machine with ink, paper and the whole enchilada. Today, they press some keys on a computer. In older times, they needed to transport the money and the whole process took time, today they press some keys on their computer and whoosh, the money magically appears in the system. A monkey can print money today; actually a monkey would probably do a much better job...

The three fun things about printing money:

First one: When the government cannot borrow anymore, they print more money. This devalues the debt because more money means that each note is worth less, but it also means higher tax revenues. Yes, that’s right, by some strokes of a keyboard they will increase your tax and you will never notice it. This is a super secret that they do not want anyone to know about. Think about it. Your money is worth less and the prices has gone up but the taxes stays the same or even go down a bit in percentage, but the actual tax is higher. When you understand this first fun thing about printing money you also understand why no government will ever give up this power.

Second one: More money in the system means (as you know from above) a higher level of spending - especially when the government combines printing with very low interest rates. People will go out and spend since they have more money (actual money “value” is, however, less) and people can borrow very cheaply. In effect this means that people indebt themselves in order to buy things they in reality cannot afford. This is what’s being done to us now from governments all over the world in a scheme to keep things rolling along, and it is partly “working”…

The Third one: All of these debts – the governments and the individual debts – in combination with more money in the system and the fact that this extra money reach different markets on different times, means that bubbles are created. Fictive values are created for certain companies, certain stocks or certain areas of the economy. The entire market gets distorted and the longer and the more money the worse it gets. In other words, the more trillions of dollars that is thrown into the system, the bigger the distortion and the bigger the bubbles get. And in our current situation they have thrown more money, in affect; done more harm then anyone ever have done in the entire history of mankind.

The conclusion – what you need to know

If you have read everything above and understand it, we can draw a fun little conclusion about GDP (gross domestic product (Swedish:BNP)). If we print money and borrow lots of money and throw those into the system it will increase GDP, just as economists and politicians are hoping for and as we can see today we can see “green shoots” and some “positive” things… Of course we do, especially within certain areas or, as we can see today, on the stock-markets.

But have we increased the value or the amount of what we produce? No! In fact, “forcing” us to spend more and indebt us more have, at least over time, decreased our ability to produce. Have we stopped the crisis? No! In fact we have seriously worsen it because now there is not only the initial problem, we have also a higher level of inflation, more debts and distortions on the market with one or several bubbles that will burst sooner or later.

To a certain extent, some economists know of some of these dangers so they know they need to - sooner or later - increase interest rates. The further down this path we go, the higher the interest rates will be. About now the actual interest rates are around 7-8% looking at Sweden and a couple of % higher when looking at US and UK. This will, of course, lead to more foreclosures and much less money available to the public since more of their income goes to pay back loans they have taken in order to spend spend and spend, and what will this do to the enemy class precious GDP? But the main problem is the bubbles that will burst one after the other, creating downturns or even trigger that depression that will hit us with full force at any moment. And since our situation is even worse, what will the economists and politicians do? They will do the same thing again! They will print more money, borrow more money and go even further down the road towards total and utter destruction. They will never admit defeat, say they were wrong or change curse. This is why I have predicted there are more stimuli’s to come, even with these “green shoots” because unemployment is so high and keeps rising. With the distortion more companies will fall, hence more bail-outs. And please remember, they have been doing this for a long while now. This is not the first couple of stupidities; it’s the biggest ones, but not the first ones.

So where do this leave us? Yes, you guessed; we are so fucked the word fucked does not measure up. We are fucked way beyond the “great depression” and way beyond anything anyone has ever seen. This is an epic failure of giant proportions that will change the world completely and I would even go so far to say that most of you will not survive. That’s how horrifying this is going to be and you, the mindless drones, you are really to blame. You voted for it, you wanted it, you live with it. Idiots.


  1. 2 wrongs in the 3 first. and a serious wrong in conclusions. But overall a very good description of many parts of how economy works...and very interesting discussion about nations getting so in dept.

    ok first the wrongs.
    "High interest rates = High savings, less borrowing = Higher investment rate"

    high interest rates give high savings and less consumtion yes and also less borrowing BUT it do not give higher investement rate because investements are not made by peoples savings anymore but with borrowed money. So instead the investement rate goes DOWN with high interests and investements are a kind of consumtion too. so it is clear case that with high interest rates all of the economy tends to decrease or slow down.

    "Of course this behaviour partially change when we factor in borrowing, but the basic principle is clear, you cannot spend more than you have earned. This goes for you as an individual, it is true for every company and it is also true for the state."
    This is not correct entirely. Of course individuals and companies and even states can spend more than they earn but only if they BORROW (yes you stated that. This dimention of TIME in economics is vital and can not be simplyfied away. It is essential and the thing that actually drives the interest rates national banks sets through consumption and investements. This way you can buy a house for 40000$ way more than that 100$ you earned the day you bought your house. but you made a contract to repay that loan year after year.

    the 3rd money talk is well described and correct-

    "But have we increased the value or the amount of what we produce? No! In fact, “forcing” us to spend more and indebt us more have, at least over time, decreased our ability to produce. "

    this is wrong. We are not less able to produce by geting in dept but less able to consume in the future. If you see it that way to get in dept is no problem as long as you do not get too much in dept personally.

    There is this inflation that starts as you so ellegantly described when we start spending more than we produce. This makes all prises go up but one. The only thing that do not increase by inflation is the AMOUNT OF THE LOAN..that stays monetary stable- so your need to pay back gets less and less problematic the higher the inflation gets. But in here lies that you need to pay the HIGHER INTEREST RATE which cost more with higher rates of interests due to inflation. But if your LOAN schrink each year.

  2. Nations with a lot of LOANS can get those loans to SCHRINK by printing money. The ones who loses ob that is the ones with cash and state bonds. Any state who tries to do this will not be able to loan again (as long as it is remembered) France did this or rather the French king did it prior to the french revolution and did simply not pay back. and hence there is no more king but there is still FRance. Also Argentina has done this. ANd Argentina is still there but argentinian state has real difficulties in borrowing money now.

    So when you make this fundamental capitalistic way to rule and govern our world into an apocalys it is wrong. The interest rates are low NOW to stopp exxessive SAVING and HALT in investements that drives production DOWN FAST AS HELL when it happens at the same time all over the world and both in private, company and state sectors. IN the 30ies governements tried to SAVE themself out of the crises by CUTS in spending and also by holding up interest rates in the national banks to state an example to people STOP THIS CRAZY LOANING AND SPECULATION....and the governements STOPPED TRADE which made ecomomies collaps and then start over at a much lower rate. Germany could no longer pay back but tried anyway the huge dept of war fines they had to pay France. And we know the rest. A war that bombed the world to pieces is a much worse way to destroy production capacity than geting in dept for a few years.

    This time gouvernements and especially national bank REALLY KNOW what they are NOT supposed to do. And also that they really KNOW what they should do. In sweden the national bank hld up the interest rates enormously the summer of 2008 at the peak of the spending and loan to stop it and cool down peoples spending. WHen it collapsed in 2008 october. The same bank turned those interest rates down to almost zero. To make people STOP THEIR massive savings.

  3. If economies get to have a few % of inflations the need of change relative prices is satisfied. Some good and services are valued more and some less. SOme workors are valued more than others and this need to be changed. And it can do so that some get a little bit more payed than others. Some god can have higher prices than bad products and eventually some jobs dissapear and some gods too. And at the same time the investements made possible by BORROWING can build that production capacity for new products that people want to buy witch is the fundamental genious about capitalism. The people get happier when they themselves deside what they want to do and what they want to spend.

    WHat happens when some countries totally over dept themselves is simply that their money looses value a little or a lot or totally (lol) and the result is that the people of those countries (USA in 2033?) start to starve and will accept any kind of work for being able to eat and sooner or later (unless there is a war going on, then there is no hope for economy - somalia, afghanistan) and when hey get those jogs they get richer and sooner or later the majority of people wuill choose to work and get richer again. But if you do not educate or keep peace in your population you are doomed to be poor. In 1902 Argentina was the richest country in the world.

    so surely usa lithuania iceland can be in trouble in the future. Lithuania i gues for a few years, iceland for 20 years, and usa will manage 10 or 20 years still and if change some fundamentals then continue prosper but if not then we will see economic shift of center of the world to Asia. As it has shifte from greece to rome to netherlands to nothern italy back to netherlands and to england and to usa in the passed.

    but apochalyptic due to capitalism failure wont happen because knowledge and functionality of the economic sfere is enough to manage all kinds of economic crises. Only climate chock like 100 meters of sea level rise or political war (like nuclear exchange or terror can do that to us.

  4. ..or a rock the size of mount everest coming in from space....


    but not capitalism and loaning money...

    --h and in the absolute worst case....when there is not food production enough (wont happen even with water 100 meters) just simply build farms in skyscrapers......democracy may be lost if not done fast enough and the state will kill a portion of the population and then those surviving wiill have food.

    not a nice planet but it will save mankind.

  5. First “wrong”:
    You are wrong, or I did not explain it well enough for you to understand. With investments I mean money going to sound and productive parts of the economy. When the money (that people should not have) is mainly spent, it seldom goes where the real power to produce is; instead it goes to services or useless things. And this is not wrong, it is correct.

    Second “wrong”:
    This is also wrong from your part and is only useless mumbles. No one can spend more than they earn, it is a physical, mathematical and economic impossibility. But/And yes, as you, and I, wrote, you can borrow, but borrowed money is not produced money, it is fictional money (for the most part) and it is not money you have earned and most of the time it doesn’t even come from productivity. It is conjured up money from the bank and/or the central bank. The lending ratio between lending-money and in-house money kept within the bank is now days 1:20 or more. But all that is another discussion, the basic is true and this you cannot change, no matter what you think or write. 1+1=2 and 2-1=1. This goes, always.

    Third “wrong”:
    Here you are also wrong. Yes, we get less able to produce because of two very simple facts. 1) As I wrote above and in the initial text, all this means there will be distortions on the market, the money will not go where they will make the best use. 2) Inflation and the growing government will make it very hard to earn money and have a sound capitalist economy since whatever you do; you earn little or nothing for it. And the further we go with this, the worse it’s going to get.

    Until here, I actually thought you know what you where talking about, but, of course, you have read economy and which makes you less inclined to really understand the fundamentals. Also you write a lot of things about the “great depression” that is not only wrong; they are the complete opposite of the truth.
    And then you mumble about how the Swedish central bank and the world politicians have handled this crisis and also here you are totally wrong. Everything they have done so far is the complete opposite of what they ought to be doing. Interest rates should be around 5% in Sweden, banks should fail, companies should go down, people should save, not spend. Would that trigger a recession? Yes it would, which is the point and why my whole text is laid out in a certain way. We already had a bad system, you cannot smooth things over and say it’s all dandy, all they are doing, and you agree on this, is to prolong and worsen the pain. Will all those stimuli, bail-outs, printing of money and so forth halt the depression? Maybe, even probable. You say this is a good thing, I say it is madness. We need a recession and we need a bad one, now, not later when it will be much much worse. The Swedish central bank, and all the others, is destroying the what’s left of the economy and building even bigger bubbles and this is what will trigger what will truly be the GREAT Depression.