Yossarian was nearly right.

It’s not that people “spunked it up the wall”

It’s that every time someone borrows money, they agree to pay it back with interest.

The only way that interest can be paid on all the due loans is if the economy has grown sufficiently to pay them AND/OR the people (including Government, banks etc) borrow even more money to pay them off.

The current problems are essentially down to the fact that so much money was lent/borrowed that there really was no prospect of it ever being paid back, but because our financial system is so sodding complicated no one really knows who is holding the bad debt.

If like me you are also a realist rather than an economist, you might take the view that actually, one of the reasons that the economy is not growing fast enough to keep this giant Ponzi scheme on the road is that we actually live on a planet with finite resources and that there are in fact limits to growth, which we are currently bumping up against.

And if you do believe that, then it also follows that even if there is some short term fix to get the economy growing again it is only delaying the inevitable – which is that our entire economic system needs to be rebuilt differently, because what we’ve got no longer works.

This is really interesting – the views on why it’s all the banks fault.

What we have at the moment is two separate issues:

1. Bad bank debts mean they are very reluctant to lend money

2. Governments have for years spent more money than they are earning.

Now the money in he bank is subject to what is called the multiplier effect. If I have £100 and I put it in the bank, I still have £100, but so does the bank. The bank lends it to Jack so he has £100 as well. He wants it to buy a car, but can’t find one to buy straight away so he puts it in different bank. Then that bank lends it to Tom. Now there is only one lot of £100, but actually five people have it and can all spend it. So there is £500 out there boosting the economy.

Now if the bank thinks that Jack is a bad risk, they won’t lend it to him, they will keep hold of it. Suddenly my £100 is not worth £500 to the economy, it’s worth £200 and the economy effectively shrinks because of reduced economic activity. This causes lower corporate profit and job losses, so less people have their £100 to put in the bank etc.

Now separately the governments were going to be in trouble anyway as you cannot continue to spend more than you are earning forever. Bailing out the banks did not make a lot of difference as the numbers involved are relatively small. What did make a difference was the reduction in taxation and increase in social security payments because of the reduced economic activity. Suddenly you have less money to pay the interest on your debts, so you make cuts in your current account expenditure (i.e. you employ fewer people and spend less on building roads, hospitals, schools etc) which compounds the problem.

So there are two alternatives:

1. Everyone including the governments gradually pays off their debts (reduces the bank multiplier effect) until we are a sustained level of borrowing again.

2. The government continues spending in order to stimulate the economy, but has to raise more money to pay the interest on its debts. In other words – increase taxes. Now the popular view is to raise taxes on the rich – after-all the poor have no extra money to give. However, what is rich? When the government wanted to stop child benefit for 40% tax payers there was outcry. So at what level? £100,000? Problem is there aren’t enough of them earning at this level to make enough of a difference to tax receipts.

So there you go.

I don’t think anyone has mentioned “wages”, which is extremely important with regards to the economic mess we’re in.

Since the neoliberals took control of British governments 30 years ago, wages as a percentage of GDP, have been driven down, through mostly a combination of attacks on trade unions and very high unemployment. In the case of the bottom half of earners it has fallen by a quarter over the last 30 years.

Now lower wages was obviously highly desirable to the neoliberals as it can lead to substantial increase in profits, however, it has two undesirable affects. Firstly it’s risky politically – governments want to be re-elected, but much more importantly, it exposes the paradox of overproduction/underconsumption.

Low wages can be very bad for the capitalist because whilst low wages might very well increase their profits, they need consumers with reasonable purchasing power to buy the products and services which make them their profits.

The solution ? …….”easy credit”. You drive down wages and keep them low, but then lend money to people so that they can buy the things they need, whilst also encouraging them to buy what they don’t need.

Profit is made from selling goods and services, and profit is made from lending people money to buy goods and services. It’s a win-win situation. Or so it would seem. It is of course typical short-term neoliberal bollox. It was, and is, completely unsustainable, and the bubble of credit-fuelled booms has finally burst. Good and proper.

And one of the reasons getting out of this mess is proving so difficult is because “easy credit” is no longer easily available. So now we have people who can’t get credit, on low wages, nearly 3 million unemployed, and everyone is being told to “tighten their belts”.

Who’s gonna start buying stuff ? Apart from the wealthy who don’t stimulate economic activity enough to make a significant difference anyway. We’re fecked. Time for revolution I fear. Only that won’t happen just yet, so expect things to get a lot worse. Good luck out there.

Say I bought a star wars toy in 1983 for £10, now it’s worth £50 – ok? I’ll sell it to you for £50 but I owe JHW £50 cos he fixed my bike, so I’ll just tell him to get the money off you. You however paint his hallway for £50 and all our debts are settled, but no cash has changed hands or has ever existed bar the original £10.

[video]http://www.youtube.com/watch?v=y6QgHUJIQ5Q[/video]

I like boriselbrus’s post the best. Shows how difficult things can be, and that it’s not just a simple case of some greedy people screwing the rest of us.

Now the money in he bank is subject to what is called the multiplier effect. If I have £100 and I put it in the bank, I still have £100, but so does the bank. The bank lends it to Jack so he has £100 as well. He wants it to buy a car, but can’t find one to buy straight away so he puts it in different bank. Then that bank lends it to Tom. Now there is only one lot of £100, but actually five people have it and can all spend it. So there is £500 out there boosting the economy.

BUT – ***the important bit that you fail to mention*** – FOUR lots of interest to be paid back when all the loans are repaid!!!!!!

Having all of that money out there sloshing about in the economy is only affordable if the economy is growing fast. Once the economy stops growing faster than the interest is mounting, then the more times that the money has been “multiplied” (in your terms) the worse mess you are in.

Your solutions are not possible – there isn’t enough wealth to pay down the debt – there will be defaults, but no one knows for sure where and to what extent.

it’s not just a simple case of some greedy people screwing the rest of us.

It certainly was a case of greedy people screwing the rest of us.

The current debt crisis was spelled out (forecast) in great detail by plenty of people, years ago – but no one in power wanted to listen. The banks didn’t care as they were raking in cash. Politicians, even if they knew what was coming didn’t want to act because this is NOT a zero sum game. Politicians have been involved in a game of chicken and we have ended up in a head on crash.

I can recommend this book:

The Coming First World Debt Crisis – by Ann Petifor – published in 2006!!!

It is written for the lay person and lays out her prediction of pretty much exactly what has happened over the last 3 years.

yossarian – Member
In the beginning…..

The banks worked out they make shit loads more cash by lending more to people even though it was riskier

Governments allowed this to happen even though they knew it was risky and they were getting massive amounts of tax from the banks in order to build hospitals, pay policemen, buy nuclear missiles etc etc etcFTFY

[video]http://www.youtube.com/watch?v=2RO_wtHf3ws[/video]

and they also wanted to borrow massive amounts of money from the banks in order to build hospitals, pay policemen, buy nuclear missiles etc etc etc

FTFYT

😆

Aye rightplacerighttime – that too 🙂

Your solutions are not possible – there isn’t enough wealth to pay down the debt – there will be defaults, but no one knows for sure where and to what extent.

Yes, exactly.

No-one knows for sure what is best and no-one knows what will happen…

The current debt crisis was spelled out (forecast) in great detail by plenty of people, years ago – but no one in power wanted to listen

Every time something happens all the smart-arses go on about how so many people predicted it but no one wanted to listen, but now I’m the clever clogs because I’m pointing it out. However, people ALWAYS write books predicting impending doom and some of them get lucky.

Same happened in the dotcom boom. People saying ‘oh I’m so clever I predicted this’ well everyone knew it was coming, but no-one knew when and everyone also knew they could make tons of cash before it did go belly up.

The thing is, everyone wants to make money. The only difference between them and us is that they have more resources with which to do it.

I blame the governments. Starting with, but not limited to, Thatcher. However, you can’t blame them too much because they need the economy to boom to get voted in.

You know what, actually.. I blame the electorate. Thick buggers who don’t know sh*t from shinola when it comes to economics and government and yet we are the ones who have to be appeased.

Stupid, isn’t it?

molgrips, you’re wrong.

Every time something happens all the smart-arses go on about how so many people predicted it but no one wanted to listen, but now I’m the clever clogs because I’m pointing it out. However, people ALWAYS write books predicting impending doom and some of them get lucky.

To be honest, you din’t need to be an economic genius to work out that all the easy credit and massive mortgages lifestyle on the never-never etc was going to lead to serious problems. People buying homes at the top of the market, then wondering why they’ve now got negative equity. People borrowing way more than they earned, then wondering why their TV/Car/Home is repossessed. People wanting the champagne lifestyle with only Babycham wages….

I blame the governments. Starting with, but not limited to, Thatcher. However, you can’t blame them too much because they need the economy to boom to get voted in.

Erm no. When Thatcher got re-elected in 1983, the economy was most certainly not booming. In fact it was worse than it had been when she first got elected on ’79.

Don’t under estimate turkeys ability to vote for Christmas. Specially when the media tells them on a daily basis that it’s good for them.