So, Crony Capitalism doesn't work!
Please tell those that live at 1600 Pennsylvania Ave, Washington DC (USA).
Sorry I couldn't resist.
Sorry for being an Anonymous Coward, but I normally don't do political commentary here.
The best economic fun of the past few weeks has been watching the meltdown of the rouble and the associated problems in the Russian economy. OK, “fun” might not be quite the right word: schadenfreude, perhaps? Real people are undoubtedly, through no fault of their own, being made worse off by what is happening - so fun is …
Please tell those that live at 1600 Pennsylvania Ave, Washington DC (USA).
Sorry I couldn't resist.
Sorry for being an Anonymous Coward, but I normally don't do political commentary here.
The US economy is far, far removed from free market capitalism. Such concepts like banks that are "too big to fail", prove this. Corporatism rules the roost now and without effective campaign finance reform the politicians will continue working for their sponsors (large banks and associated mega-corps) rather than the people.
I would like to see a coherent explanation of how crony capitalism (caps are not appropriate here) explains the growth in the US of the semiconductor industry, the computer industry, the computer software industry, and various internet based enterprises such as Google and Amazon.
Giant country and actually for every Intel, MS, Google there are 10,000 fails or mediocre companies.
Actually Google, Amazon & Apple probably hurt US economy by removing money from circulation and in Apple's case doubly so by borrowing to pay dividends..
Google, Amazon & Apple remove bugger all money from circulation when viewed in the context of QE - or printing as many 'new' dollars, pounds or euros as our esteemed overlords feel like.
Add to this the fact that with fractional reserve banking, loans made by banks are little more than money created out of thin air, and it becomes apparent that the whole system is a house of cards.
It continues as long as the participants believe - or pretend to - in it, but at some point someone of power/influence is bound to say "Hold on, this here's all funny money which doesn't really exist".
And then? - Solids, meet air-conditioning...
I love it when people use the phrase "fractional reserve banking". It just means that the rest of the comment is going to be deluded nonsense. It's Bullshit Bingo time.
For the love of God, one final time, here it is: FRB only creates money if you are an idiot that forgets to subtract debt from money. The total assets have gone up, yes, as have the total liabilities. The money isn't generated from thin air.
Just think through it: my family lends me some money because they don't have anywhere to put it, and I know people who need it. I keep a bit of it to one side, in case they need some back, and lend the rest on to someone else at a slightly higher rate than I give my family, to take account of the work I'm doing. How much money is there? I have a few per cent of the original, the people I gave it to have the rest. No money has been created. What also exists now is a debt from the company to me, which I in turn owe to my family, and this is considered a debt on one side of the deal and an asset on the other.
All FRB means is that there is an intermediary doing the loaning, and the loan appears on both columns of their ledger: asset and liability. If I acted purely as an intermediary, and put my family in touch with the people I knew to lend the money directly, charging a small commission, the effect would be the same, and my profit would be the same, but the bank wouldn't have assets and liabilities, and people like you would have to find another catchphrase to get frothy about.
I love it when people use the phrase "fractional reserve banking". It just means that the rest of the comment is going to be deluded nonsense.
Yes, it's long been one of my amber lights as to the level of fiscal comprehension likely to follow. I think we should tax the use of the term until people either bother to understand what it actually is, what it actually means, and what it actually does, or just give up and admit they don't understand FRB, or indeed finance at all.
Socialists seem to use the term more than anyone I know in the City, perhaps because it is one of the few terms they're vaguely familiar with and mistakenly believe using a few terms they don't properly understand adds credence to their view. It doesn't, of course, because anyone that does understand finance can see straight through postings by those who don't.
The point you seem to have missed is that debt is being "monetized." Banks do not loan "money" per se, that is credit symbolic of existing value. They loan future money - Wimpy's promise to pay tuesday for a hamburger today. They accept your promise to work your butt off so that you can buy a house and they can collect interest which will roughly double or or more the amount you actually need to pay. Banks are allowed under the FRB system to loan a certain amount based upon what they have in reserve. In addition if you were to deposit the loan you received from them back into the same bank, that loan then - at a discounted rate - becomes part of their reserve. That can then also be loaned, and that cycle can be repeated over several iterations: house-car-boat-credit card-... All the bank actually loans is your or someone else's promise to work long enough to create the value, plus interest at a compound rate. Also, if you look closely at your example, the one thing you are not doing is making a living. So, out of that "bit" you set aside, or out of the interest made to repay that loan you are extracting a living yourself, and the "value" you added to the transaction is debatable. Monetizing debt is inherently inflationary and cannot be avoided - and hasn't been during the entire span of western history. The problem with banks is not that they are bad some how. They impede the research into and development of any better methods of reconning values and costs, or where "money" should come from. At present in the US, although the Constitution places the creation of moeny squarely on the shoulders of congress, with the exception of [relatively] tiny amounts of cash printed or coined at government mints, essentially ALL money in circulation is monetized debt issued by private sources (banks - that is).
It's much easier to keep all of this straight if we make the simple distinction between money and credit. Also known in monetary circles as base money and then money (which is where some of the confusion comes from, but the distinction is the same in both cases.)
Money, or base money, is what is created by the central bank. Coins and note,s yes, but also some electronic money. Credit, or money (in the other definition) is what is created by the FRB system, the banks etc.
Yet another set of definitions is to use M0, M1, M2 and so on. M0 is purely that central bank money creation. M4 is all of that plus all of the credit creation by the FRB system.
And the important point for us here, talking about Russia and Rosneft, is that creation of more base money, more M0, is much more inflationary than creation of more M3 or M4 (bank credit etc). I won't bore you with technical details as to why this is so but it is (OK, because the multiplier of how much more more money and credit can be created on the back of it is much higher).
And that's what has really been done. Some bank credit (which would be in M3 or M4, but not in M2 or lower) has been replaced by the issuance of new currency, M0. This is also monetisation of debt and is highly inflationary, comparatively. Go too far with this (and "too far" is a flavour, to taste) and you get Zimbabwe.
It's like when people use the word "Quantum" or "Pharma" in a discussion about healthcare.
You're talking about the "loanable funds" model of how the banking system works. It's true for non-bank entities that don't get to issue their own credit as being equivalent to cash. If you're a bank (or any other entity whose credit is traded as if it were "money") then the financial system works differently.
Have a read up on MMT (Modern Monetary Theory) if you're interested in learning about this way of looking at the financial system.
@DavCrav, re: The money isn't generated from thin air.
Why does paragraph 4 of this Bank of England document say that's exactly what happens, then?
Such concepts like banks that are "too big to fail", prove this
Can't believe this still has to be explained.
The issue isn't that the banks are too big to fail, it's that banks have too many customers (you, me, small/large businesses). If a bank fails and takes a billions of dollars/pounds/euros debt down with it the people who lose out are the customers - there is a long queue and the bank customers are to be at the back of it. The houses you borrowed against are now assets of a liquidator and inevitably they will be sold to pay of some (probably foreign) investor and the whole things costs admin time and money. Outcome: everybody is poorer.
On the other hand if you rescue the bank you can fix it's fundamentals and eventually sell it off you can stand to make money, or potentially significant volumes of money, effectively for the tax payer. Yes, rescuing a failing bank is an investment in both it's customers and the bank itself.
RBS is the classic example in the UK - if it's shares are worth £5 each the taxpayer breaks even, any more they make a profit, i.e. we're richer than we were before. They've hit £4.03 and most investors can see a time when they'll hit the target, frankly they'd probably have been there already if it wasn't for the various banking scandals since. The share price has tripled from the lowest point, the gap is easily made up - and no customers ever lost their homes/savings/pensions/jobs so the state didn't have to invest in that directly where there would be no possibility to recover the costs.
The problem isn't rescuing banks, it's the effective lack of prosecution and consequences for people who let it happen in the first place; be it regulators or people who worked at those banks. That's where the cronyism has to be rooted out.
@Mage, RE: "Giant country and actually for every Intel, MS, Google there are 10,000 fails or mediocre companies." Indeed there are many fails for each success, and few of the successes reach the magnitude of an Intel, Google, or Walmart. But the "crony capitalists", whoever they may be, do not prevent people from trying, often succeeding, and very rarely succeeding wildly; and in general they are due little credit for the success, or blame for the failure of new businesses.
@streaky: that defence doesn't hold water.
If a bank goes under, that doesn't mean everyone who has money deposited in the bank loses out. That's what deposit guarantee schemes are for. In the UK, you're covered up to 85,000 pounds per banking license. So as long as you don't have more than that amount deposited with any one banking license, you're literally as safe as if the money were in the Bank of England itself.
As for the houses being sold - because the Evil Foreign Liquidator would just spontaneously orgasm at the prospect of a property price crash in the UK, where they now suddenly have substantial interests? Yeah - no. It's in nobody's interests, certainly not the person who holds the debt, to force borrowers to pay back their debts ahead of schedule. The most they'd be likely to do is raise rates, and at that point there's nothing to stop you taking your mortgage elsewhere.
RBS: " if it's shares are worth £5 each the taxpayer breaks even, any more they make a profit". Here's news for you: if you invest in something in year N, and succeed in selling your holding at the same price in year N+7, that does not make you a fiscal genius. To really "break even", the shares would have to reach around £10 (by the end of next year - and as more time goes by, the breakeven point only goes up). They're not going to do that.
"That's what deposit guarantee schemes are for. In the UK, you're covered up to 85,000 pounds per banking license. So as long as you don't have more than that amount deposited with any one banking license, you're literally as safe as if the money were in the Bank of England itself"
You're right - but who pays for it. Oh, yeah. Taxpayers do - and again there's no chance of recovering it, and the state would probably have to borrow to cover it. End result huge black hole versus sellable assets.
"To really "break even", the shares would have to reach around £10 (by the end of next year - and as more time goes by, the breakeven point only goes up)."
It does - but not by *that much*. Remember that interest rates are effectively negative. You actually make money by not keeping it in a bank but by spending/borrowing. There's a cuttoff sure, that cuttoff does move but not by the amount you're suggesting. It could but it hasn't.
The reality is if they were sold today the taxpayer would make a loss but nowhere near as significant as the loss on burning all the accounts, compensating everybody and the admin costs of stripping the bank apart.
Techically there's never *been* a fully fledged free market capitalist society. All markets have some degree of influence or manipulation by governments, even if it's just regulating what can be traded legally (since this pushes up the risk and the reward of trading such goods beyond what pure supply and demand would) and government granted monopolies (copyright, patents and trademarks)
Sorry, it is YOU that doesn't understand FRB.
The spreadsheet works as you say, but is exactly irrelevant.
Because you don't understand what money is either. As it is used in practice, money is not a heap of a thing, it is a velocity. I (continue to) work my standard working week, and I get to spend £X per year on stuff that I want, which in turn depreciates over time - iPhones over a couple of years, food rather more quickly.
FRB works by hugely inflating the velocity of money, to a precisely arbitrary extent.
Let's assume a sample 5% tier1 capital ratio requirement. Bank has £1M, so it lends out £20M.
I take the money, spend it in the real economy. Each of the suppliers I pay money to, put that into their bank- bank#2. Bank 2 has £20M of deposited assets, so it can (and does) lend out £400M. Etcetera to happy pig land. What stops this diverging in practice is that money is also used as a medium of exchange, taking out some of the exponential feedback.
Key point #1: The amount of circulating money scales exactly inversely proportional to the arbitrary capital ratio requirement. Drop that to 2.5%, and quantity of money sloshing about in the economy doubles. It is not "fixed" like "grandmas family bank"
Key point #2: None of the banks have any incentive to care about the debit side of their balance sheet. If (when) the bad loans become due, they rely on government to square it.
Key point #3: That is why (and when) inflation occurs. During the boom time, we all buy stuff because the spreadsheet says we can afford it. Actually, we can't, it is illusory. Then bust times come, there is no larger pot of money to raid, and governments have NO CHOICE but to print money. The inflation occurs during the boom time from FRB, but becomes apparent later.
Key point #4: why do I say only money velocity matters? Because, the £50K in my bank account is a convenient fiction. Actually, I get paid £50K a year, and spend it. Nothing, absolutely nothing, changes if I add a 0 to those numbers. Very small fraction of population have more than 2 months savings.
Banks creating money to make loans indeed isn't counterfeiting. It's only check-kiting... and this created money is backed by the collateral on the loan, if not by the gold in Fort Knox. So the system just allows the supply of money to grow to a level commensurate with the real wealth of the nation, rather than allowing a lack of gold-backed money to prevent people from working and producing.
However, the system is still fragile. Things like a collapse of real estate values can cause collateral for a lot of those loans to stop having enough value to actually back the created money corresponding to it. So, while the banking system is indeed not a scam, as people from Social Credit and so on might have you believe, it's not as rock-solid as the gold standard either.
Well lets hope that Putin makes a nice soup.
Cream of Tomato
Putin the kettle on for a cup-a-soup...?
Baaad pun time!
Actually, one of the things Russians are particularly good at is soup. And not just cabbage or beetroot. They have loads of soups.
And dumplings. They're pretty good at those too.
... when the Ukraine thingie started happening.
Putin is a putz. At best.
I thought the reason the Saudi's were doing it was to screw up investment in western shale oil which would wipe out a lot of their customers.
Worse, from their point of view is that if the US/UK don't need to obtain oil from the middle east then we have no further geopolitical reason to attempt to stabilise the middle east.
You see, Saudi Arabia funded most of the terrorist organisations. Given, not because they have any particular love of them but because if you don't pay them then they start operating in Saudi Arabia, and paying them was simpler and not particularly harmful. Now they have a large group of terrorists they funded setting up a country on their doorstep. Oops. Still, it's ok. The US/UK can be relied on to do the dirty work in removing ISIS. As long as we don't get fed up, and tell the middle eastern countries to deal with it themselves instead of paying terrorists protection money.
It'd actually be good for the middle eastern countries to deal with this sort of thing themselves. Western countries developed through civil wars, revolts and revolutions and the middle eastern countries need to do the same to progress.
At the moment I think a lot of people would be quite happy to leave the middle eastern countries to it. However, we can't because we actually have to buy oil from them. But not for long, if shale oil takes off. That we might be in a position to say "your on your own" genuinely scares them.
From their point of view, dropping prices by 35% screws up shale oil investment, keeps us in the middle east to deal with the problem they created by funding terrorists for years and it also dents ISIS's income from oil revenue.
There's also the matter of Israel, probably the only "decent" country in a region full of "bullies." And they have the scars to prove it, too. Basically, they're the OTHER reason we have to pay attention to the Middle East, as the Jews are pretty much Old Testamentarian. When someone hits them, they hit back, turning the place into a powder keg (rumors fly it would be an atomic powder keg, at that). If someone gets crazy enough to decide to do something big in Israel, odds are it'll be the precursor to World War III.
"The US/UK can be relied on to do the dirty work in removing ISIS."
Well, not really. Outright military occupation has failed to destroy either the Taliban or Al Qaeda. In fact, Al Qaeda now controls more territory worldwide than it did before the US et al occupied Afghanistan.
First thing: A homegrown guerilla force always has had home turf advantages that make it very hard for an foreign occupier to defeat it. The availability of effective weapons of war in the post WWII world tilted the balance further. With AK47s, RPGs, shoulder-launched missiles, a wide variety of explosive devices, etc, the homegrown guerilla force is virtually unbeatable in any long-term sense.
Second thing: In traditional military action, sowing chaos upon the enemy will eventually result in his defeat. (Bust up the Third Reich's military-industrial complex, disrupt the fatherland, and the army will falter and crumble.) But that doesn't work when fighting terrorists -- because terrorist organizations thrive best in social chaos. Bomb granaries and social centers, as the US has done in Anbar, and locals will cooperate with ISIS more often, its recruitment will rise, arms and money will accrue, etc. ISIS will get stronger.
The US and UK will fail to destroy ISIS, just as they have failed to destroy the Taliban and Al Qaeda.
The banking aspects of the Russian bear-trap are beyond my ken -- but it makes sense on the face of it that an inefficient system does not become more efficient when a corrupt planned economy is replaced by a corrupt cronyist economy. At least so far, a corrupt corporatist economy with a capitalist veneer seems to be better.
"The banking aspects of the Russian bear-trap are beyond my ken"
As described by TW, it sounds remarkably like what Our Friends in the City call 'quantitative easing', complete with an extra touch of re-hypothecation of 'assets' as collateral for further loans (also much loved by Our Friends in the City).
Obviously it couldn't be that though, because QE and re-hypothecation are Good Things (according to Our Friends in the City).
Nick Kew's post (reference timestamp needed but not available) has more details.
Happy New Year.
> if you don't pay them then they start operating in Saudi Arabia
You haven't been to Saudi Arabia much, have you?
I left the country a few years ago (pre-Arab spring) but back then the situation was highly unstable, to put it mildly. In fact, Libya and Egypt were oceans of calmness compared to Saudi.
Not that you would hear about it in the news, mind.
As Krugman and similarly minded economists will happily tell you, there's a difference when you borrow in your own currency versus borrowing in somebody else's. And similarly, the dose makes the poison. Not all expansions of the money supply end like Zimbabwe.
A little bit more inflation back in 2008-9-10-11 would also have done a heck of a lot to refloat some of those underwater loans.
You are spot on in terms of description, you just missed the whole picture.
It was not just Saudi selling oil under cost. It was USA too. Ever since the Suez crisis, USA has maintained an immense oil reserve. If we plot the amount of oil in reserve it has been dropping from the moment the Ukraine conflict started. The current stock is nearly at zero and this has hurt the Russian economy 10 times more than all the embargo measures.
There are two long term aims here:
1. Destroy as much as possible of the current energy relationships worldwide to ensure market for USA as an oil exporter. Eu is "wheened off" Russian gas dependency. Nice ain't it? Well, I am not so sure as it is replaced short term by gas imports from USA shale, long term from Eu being forced to allow USA shale industry in. As all patents on shale exploration are held by USA corps there is only one shale way - it is the USA way or the highway for the next 10+ years (probably more as USA will extend these patents at least once beyond the 17 years normal patent term).
2. Destroy Russia as the sworn enemy. When the Soviet block (and union) collapsed there was a turning point for about 10 years when Russia could have become a democracy. That opportunity was lost because a number of external powers inclusive of USA, UK, Saudi and Qatar sponsored actively "freedom fighters" along its Southern borders. It is wonderful when a freedom fighter rgoes and blows up a bus with hostages somewhere near Rostov-na-Don or takes a few pregnant women for human shields from a maternity ward. Fantastic thing to sponsor ain't it? Well we did. In a reality like this democracy does not grow - and surprise, surprise it did not. We should be thankful that Putin emerged out of this particular west sponsored event. It was a matter of luck (or some interesting "coincidence") that general Lebedev died in an accident at about that time. Otherwise we would have been at the gates of WW3 with this policy.
As far as USA happy to see chaos in the Middle East it is the same story - destroy existing oil supplies, benefit gas suppliers to "replace Russia" (Qatar which was nobody 10 years ago) short term and benefit the shale exporters short term, the industry as such long term. After all, what are the lives of 140 million people versus the profits of USA oil producers and shale gas exploration intellectual property holders.
As for your last comment, I do care and if you had relatives being slaughtered by Putin's criminal thugs you might care as well.
Putin has created a hell in the East of Ukraine, and I for one will never forget or forgive.
Align yourself with him because its convenient and because you hate the US or the EU is contemptible.
Hate any of them, but do it for the harm they do. Do not forgive them and next year pretend it never happened!
"A US quasi-satellite, Saudi Arabia, is allowed to sell oil below cost"
Saudi cost is $20-$30. They are among the lowest if not the lowest cost producers.
They don't lose money at todays prices they just make less.
The cost base does matter but what is more important is the $ value used for state budget long-term planning. For Saudi Arabia it is around $85-95, don't remember the precise figures.
This implies Saudi Arabia does this involuntarily and cannot afford to do it long-term without risking socal-support-related protests. This also implies US has most probably forced them to lower the price to hurt Russia or they both conspired, the upside for Saudis being better long-term profits after putting Russia into a difficult position.
One more thing to remmeber is Israel pays and trains ISIS as well as US and others so Syria can be removed as the obstacle to building Europe-bound oil and gas pipelines. Israel is also developing huge gas deposits in Eaestern Medi. waters and has already proposed to EU building pipelines ending in Southern Europe. That puts American pressure on Russia in a whole new perspective, given US politicians being largely controlled by money or blackmail by Jewish organizations.
@ Rota Virus
"One more thing to remmeber is Israel pays and trains ISIS as well as US and others so Syria can be removed as the obstacle to building Europe-bound oil "
There is not enough tin foil on this planet to cover your head
Enjoy your bubble or find a script without cliches.
"The oil extraction cost may be $20-30, but anybody who tries to run a company based on the COGS will rapidly run into trouble with the bank due to those pesky overheads."
well plenty of internet companies are trying but the point is that even at today's prices they are not selling below cost.
In the long run, Saudi Arabia cannot sell oil above the market clearing price, and it is not incumbent on producers in other parts of the world to adjust their prices to allow the Saudis to meet their budget planning targets. If the clearing price is ~$50 a barrel as it seems to be at present, and they need ~$90, it is unfortunate for their plans, and they should rethink their plans. Similar considerations apply to the Russian oil producers and the government under which they operate.
"A US quasi-satellite, Saudi Arabia, is allowed to sell oil below cost in pursuit of its strategic aim to enforce its raving loony version of Islam on the entire Middle East by targeting states that don't persecute Shi'a."
The Saudi state is essentially Sunni and has persecuted Shi'a's living there repeatedly.
One small point on the Saudi Comment: Saudi Arabia is a very small country. They built the well heads and infrastructure for producing oil decades ago. There is still a lot of petrochemicals beneath all that sand. This means that they have very few expenses apart from maintenance.. there is no exploration or development costs when you know where the oil is (right beneath you) and you already have the drilling equipment in place.
The Saudis aren't selling oil at below (their) cost, are still making money at the current prices, and would be able to do so even if they fell further.
Putin has created a hell in the East of Ukraine, and I for one will never forget or forgive.
But Donchik, you're of course welcome to hold your own point of view, but specifically when did Putin create this hell? By when, I mean on which exact date?
....some clues....was this before the 2004 externally funded 'Orange Revolution'? or was this creation/inception of his hell before the 2013 new externally funded Color Revolution was started in Ukraine, or was it....? context is everything, events are seemingly part of a long and complicated, almost unbelievable narrative...precision is important
I also have relatives in this war zone, they didn't choose to have a war, but I think it's beyond doubt that the list of people who did choose a war is somewhat longer and wider than the single name you've offered
I'm not Putin aligned, although as I prefer my news/discussions to be accurate, I sometimes recently choose Russian propaganda to be more believable than American propaganda - I recognise propaganda as news sources were banned during my life in KSA and I had to secretly buy a powerful radio to listen to the BBC WS. Now I wouldn't bother, I'd spend my time collecting fossils from the desert.
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