Retirement, the future and The Economist

The editors and writers of The Economist news magazine must be ageing and not seeing things too clearly.  That is my conclusion after reading their recent special report on the future of elderly people.  Another option is that my view of the future is incorrect.  The Economist is much more optimistic than I am, I hope they are correct.

I disagree with them on three issues – the future of the economy, the work ethic and financial issues.

Most of their readers probably have a vested interest in continued economic growth and to prosper the magazine needs to support this. And they do.

This blogger figures the current economic problems are related to energy and mineral resources.  We have used up the most accessible of these and those which are left take so much energy to extract they are worthless.  If this is correct the outlook for the future is rather grim.  We can anticipate a lot of human suffering as we have to adapt to a down economy.  So far retirees have largely been exempt from this but our time may be coming. Trump, Brexit, Saunders, Corbyn and Macron could all be symptoms of this problem.  Lots of people recognize something is not right but do not know what it is.

In recent years The Economist has come up with a number of cute cures for the economic crisis.  This time we are going to save ourselves by getting people to work further into old age.  This commitment to the work ethic may be good for those whose fortunes and status depend upon getting other people to work for them but if the above analysis is correct increasing economic activity will use up more energy and resources and bring forward the timing of a complete economic collapse.  Rather than promoting the work ethic we need to be pushing a leisure ethic  in which people get their self identity from doing non economic things such as music, theatre, art or writing a weblog on economics. The Economist talks about a longevity dividend.  Should this dividend be more work or more leisure?

One of the features of money is that it gives a person control over resources.  Financial obligations left over from the era of prosperity mean some older people have a greater  command over current resources than the young.  Older people are going on luxury cruises in which a waiter from a third world country puts the pepper on their food while their grandchildren are struggling to find jobs and homes.  When the crisis hits pensions and other savings the cruise ship operators will be lobbying for the release from prison of a famous Italian captain so they can put him back to work.

This blogger tends to be pessimistic about the economic future.  I figure I was very lucky in the time and place in which I was born and have lived most of my life (1941 and western Canada).

This columnist from The Economist is encouraging theft

This post is to accuse the Buttonwood columnist in The Economist of encouraging the theft of people’s savings.

In the Nov 30th 2013 issue he/she says “Debt needs to be reduced by default, inflation or financial repression (keeping interest rates as low as possible).”

Lots of others including economists concerned with government policy make similar statements.

The problem is that one person’s debt is another person’s savings.  Therefore when debt is reduced by default or inflation it is going to take away from somebody’s savings.  This might be more visible if loans were made directly from a saver to a borrower without the financial intermediation of banks.

It might also be easier to understand if we were to define money as something representing purchasing power.  Thus a loan is a transfer of purchasing power from the lender to the borrower.  If the loan is not repaid because of default or is reduced by inflation then the lender has lost some of his/her purchasing power.

Some people might say the losses from default are carried by financial institutions.  This is true only if the banks are making excess profits.  If they are not making excess profits and maybe even if they are the losses are most likely to be spread over all their depositors in the form of reduced interest payments.

Of course people who owe lots of money, especially governments, benefit from inflation because they don’t have to repay as much purchasing power.  The ideal should be price stability – zero inflation and zero deflation.

However it happens default or inflation reduces the purchasing power previously owned by savers.  To me this is theft by or on behalf of borrowers.

Which is more likely – deflation or inflation?

Conventional economic wisdom, as illustrated by the cover of last week’s The Economist, says deflation is a major threat.  However, this blogger, ever the contrarian,  figures inflation, perhaps even hyperinflation, is a more likely threat.

 The idea that deflation is a threat appears to be  based on the concept of inflationary expectations and the desire by those who make decisions on behalf of he government to maintain mild inflation to help deal with government debt.

That high inflation is a threat is based on the formula MV=PQ, known as the quantity theory of money although I prefer to call it the connectivity formula as it connects the financial and real sides of the economy.

 The case for deflation is made in the November 9, 2013 issue of The Economist. (http://www.economist.com/printedition/2013-11-09)

The above formula tells us that the money supply times the velocity at which it changes hands is equal to prices, or a price index, times the quantity of goods and services produced.  It is not clear everybody accepts this formula but I think it contains a lot of truth.  If one of the four variables changes then to maintain the equality one or more of the others also has to change.  For example if the quantity of goods and services goes up then the money supply also needs to go up.  If the increase in money supply exceeds the increase goods and services, then velocity must go down or prices must go up.  Through recent decades prices have gone up and we have had inflation.

 The  current economic crisis is probably mostly a crisis in Q.  While there are still a lot of mineral and energy resources in the earth’s crust we have extracted the most easily accessible.  What is left is difficult to extract and requires a lot of energy.  In the past economic growth has covered a multitude of economic sins.  It is not clear that the economy will be able to return to the type of growth we have experienced since the start of the industrial revolution.

 During the depression of the 1930s the monetary authorities deliberately restricted the money supply (a reduction in M) and this led to a reduction in Q, a recession and a number of financial institutions failed.  This time they are not going to make the same mistake and have been trying to increase the money supply calling it quantitative easing. Large amounts of money have been pumped into the economy.  Consumer prices have not increased and it is tempting to say the formula is not valid.   It could be that velocity has fallen (there are complaints that corporations are sitting on piles of cash) and that price increases have been in paper financial instruments.

 We should note that Wikipedia gives four major examples of deflation in American history and all of them involve contractions in the money supply.  Maybe the formula holds.

 If the formula is correct and with all the excess money floating around the economy, then there is quite a bit of  potential for something unpleasant to happen.   If not high inflation, then a financial crisis in which the money supply is reduced.  In either case the paper used for those financial instruments might have been more useful as firewood.

 Inflation is complicated by the fractional reserve creation of money.  As can be seen from the formula the money supply needs to flexible up or down according to variations in the quantity of goods and services produced.  But our money supply is created when banks make loans upon which interest is charged. Rather than flexibility there is pressure for the money supply to increase continuously.  The result is a Ponzi scheme which collapses from time to time.  Oops, here comes another financial crisis.

 The goal should be price stability or a zero inflation rate.  As loans are in nominal terms when prices go up people who have borrowed benefit at the expense of those who have loaned the money.  If you are a lender, the higher the inflation rate, the more purchasing power you lose.  Deflation works the opposite way, in that a borrower has to repay more purchasing power.  As governments are major borrowers it is hardly surprising that those who set economic policy are anxious for moderate inflation.  Inflation is a tax if not theft.

 Those  charged with setting government economic policy fear that low inflation could easily slip into deflation.  That would  make repaying government debt more difficult and in the past deflation has been associated severe recession.  The difference this time is that there is lots of money available to facilitate the exchange of goods and services.  Hyperinflation would wipe out a lot of savings, fortunes and pensions.

 Whatever happens it looks as if there is a lot of potential for increasing economic chaos.

High pay packages and restricted competition

The Economist appears to be defending high pay packages for company bosses in this article about the current focus of criticism.  The argument is that $52 million is justified by performance but one has to ask if this performance is based on the skills of the chief executive and if so what skills.

The general rule is that firms make profits by getting governments to pass legislation which restricts competition.shokunin_businessman

I don’t know much about the health care industry (the firm is McKesson, a big American wholesaler of drugs and other health-care supplies) but this industry involves a lot of emotions in that many people will use a lot of purchasing power in the hope of living an extra two years – possibly in a nursing home.  It is also an industry that depends upon patents for its profits.

It is not clear to me that this firm is making huge profits because of the skills of its boss.  Maybe the smartest thing this guy did was to get into the health care industry.

I am also wondering about the ethics and morality of a firm (or industry) that uses patents to exploit people’s emotions to make excessive profits.  But what the heck, some of the points in this post probably apply to a lot of other industries.

Economic growth and thinking outside the box

This column in The Economist leaves me feeling extremely uncomfortable because it speaks for all those economists (and others) who are in denial about the reasons  for the economic crisis and the need for thinking outside the conventional economic box to deal with it.

For some time The Economist has been saying the economic crisis must and can only be solved with more growth.  And the way to attain economic growth is innovation and increasing productivity.  This column claims aging workers become less productive than younger workers and the aging workforce dooms us to decreasing rather than increasing productivity.

clownIf only older workers could increase their productivity then all our problems would be solved.

Another article in the same issue talks about the economic crisis around the world.  I find it a bit of a stretch to think that all these problems are a result of an aging workforce in the rich world countries.

One has to observe that in the last few years the marginal cost of a lot of energy and mineral resources has gone up.  This means the most easily extracted of these resources have now been used.  What is left will require more energy to extract.  This has to have a negative impact on our economy.   It could even mean that future growth will be difficult if not impossible.

This is a much more serious issue than what most people can admit.  Rather than asking people to work harder and to use  Google glasses we need to look for ways to organize our economy so that our welfare does not depend upon continued economic growth.

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

Subsidies for consumers rather than producers

People writing for and editing a magazine named The Economist should know that government subsidies to manufacturers are evil in that they distort prices, cause inefficiencies in production and are unfair in that they help a few people and not others.  Yet in this article this magazine appears to be saying subsidies are to be encouraged.

Governments give out subsidies to protect jobs or to encourage firms to locate and provide jobs in their areas.

Surely it would be better to give subsidies to consumers rather than producers.  Then prices would not be distorted and the market economy would operate efficiently and according to the values of all people.

Also subsidies to consumers rather than producers could be organized so that we could meet a collective responsibility to ensure all people have the opportunity for minimum standard of living.

Electronic money payments in the Middle East

This week’s The Economist has an article about the introduction of electronic payment systems in the Middle East.

This sounds like a major change in the type of money being used  – a transition from cash to a more intangible type of money.

It illustrates that money should be considered purchasing power rather than a commodity.

I wonder what percent of the money supply in Middle East countries is cash and what percent is bank deposits?  To what extent is fractional reserve money being used?

For their sake I hope the transition does not include increasing fractional reserve money because that is a Ponzi scheme.  As fractional reserve money is based on loans if all debt plus interest had to be repaid at once there would not be enough money.  This type of money works only so long as there is continued economic growth and a continuously increasing supply of new money via new loans.

(The author of this comment has a web log on economics at https://economics102.wordpress.com/)

Rape and the battle of the sexes

This one is a little off topic but if The Economist can run an article on rape, then I can comment on it.

Most of us  are sexual people to some extent or the other and in some way or the other.  thus there are a lot of variations.   The variations could include men who want their partners to be willing and women who want a little bit of force.

Rape is only one part of the battle of the sexes.   There are a lot of women who are liars, selfish,  inconsiderate, or dominate and these women can cause a lot of grief to their partners, probably even more so if marriage is involved.

Recently while on a cruise we took an excursion to a native village.   Having had some experience with natives in British Columbia where it has been said some 90 per cent of the people have experienced sexual abuse, I was wondering if these natives had similar experiences.

On the bus ride to this village we were told that by the age of 14 most of the girls had two children.  It would appear that sexual abuse just did not exist for them.

I consider it wrong to force one’s sexual values, morals or practices upon others.

There is an old “Confucius say” line that rape is impossible because a woman can  run faster with her pants up than a man with his pants down

 

If you liked this post your are invited to comment, press the like button and/or click  one of the share buttons. If you disagree you are invited to say why in a comment.  While I like the idea of sharing this platform, my personality is such that I don’t reply to many comments.

 

Running at banks

Today’s issue of The Economist has an article fears of bank runs in Europe.

Runs on banks are such serious things that you cannot expect any banker to tell the truth when his bank is threatened.    A large enough run would also impact a country’s money supply and that has to be a concern for all of us.

If a bank is unable to refund its deposits it is probably because its loans have gone bad.  It could also be because the banker has made some bad bets such as  on interest rate movements.

There is so much debt around that most of it, especially that of governments, will never be repaid.  The best that can be done is to keep rolling it over.  There is a high probability that eventually a lot of people are going to lose their savings either from bankruptcy or inflation.

Deposit insurance schemes can protect against small problems – the banker who makes a bad bet on interest rates – but I’m not sure they can protect against the general widespread debt problem we now face.

According to the article one suggestion for Europe is greater financial integration.  This could delay the crisis but would probably bring everyone down at the same time.

 

Women in the boardroom and real power

An article in this week’s The Economist discusses the “problem” of so few women in the boardrooms of European companies.

It may be that there are so few women in the boardroom and at higher management levels because women are smarter than men in that they don’t want the stress and responsibility.

I figure that if you look at society as a whole rather than just the business world we live in a highly matriarchal society.

Most women realize that the real power is in values and relationships and this is where they really dominate.  When little girls play with dolls they learn that they can have relationships in which they have total control over the thoughts and actions of the other  party.

It is a lot less stressful to leave business to the men and put the pressure on them.  That is smart.

Regulations and The Economist

This item was posted on The Economist website as a comment on an article in regulations.

http://www.economist.com/node/21534767

I have a theory that generally government legislation and regulations work mostly to restrict competition so that some people can make profits (which are not available with greater competition).

I don’t see how regulations are going to stimulate the economy.

Therefore regulations should be evaluated according to how they will make life better for us and how equally they are applied.

The blackboard and the economic crisis

This week’s edition of The Economist has a series of articles focusing on the European financial crisis.

If we want to understand what is happening in Europe and the rest of the world I suggest we need to start by going back to the blackboard.

When my economics professors stood in front of the blackboard most of them drew a graph with two lines in the form of an x.  The macroeconomic professors usually labelled  one as representing the economy in financial terms and the other as representing the economy in  real or physical terms.  This is an important distinction which tends to be forgotten when we analyze problems away from the blackboard.  It is to easier to look at an economy in terms of its currency.

It is important to note that these two lines intersect so that what happens on one side will influence what happens on the other side.

So we need to ask if the current European crisis and if the crisis in the rest of the world is really a financial crisis or is it a crisis  on the physical side, in the resource base, which is showing up in financial terms.

There are some people who believe we are using  up resources at a rate which is  beyond sustainability.  If this is the case it is no wonder the people of this planet are dealing with a multitude of economic problems.

The Economist is pushing for policies which its  writers believe will restore growth.  It may be that instead we need to look for policies to manage negative growth.  The problem with policies to create more growth is that they will probably lead to even more using up of resources and will thus bring forward an even worse economic crash.

Pig-headed politicians playing poker or are we really cooked?

In the lead editorial of the June 18, 2011 issue, .The Economist holds pig-headed politicians playing poker responsible for our economic future. (Thanks to a mail strike I just received my copy)

There is a real risk that the politicians’ pig-headedness could lead to disaster. The odds of a catastrophe—harsh fiscal tightening in America, or a crash in the euro zone—may not be high, but neither are they negligible. Though economic logic suggests that the world economy is just going through a sticky patch, squabbling politicians could all too easily turn it into a meltdown.

Politicians like to take credit for a growing economy and voters like to blame them when things are going badly. And, current leaders may be pig-headed, but are they any more pig-headed than their predecessors? I figure the economy happens due to factors other than politicians. A more likely explanation for current economic problems is that we are depleting our resources. See an earlier post on The Living Planet Report.

The following quote is from Ernest Hemingway’s A Farewell to Arms. (Chapter XXl).

 He said we are all cooked but we were all right as long as we did now know it. We were all cooked. The thing was not to recognize it.

Hemingway was talking about the Italians during the first world war but this comment could apply to our current economy. If we are “all cooked” and we knew it, then we might be able to manage the crisis so as to minimize suffering. As that is an impossible dream, we might be better off not to know it. Let’s join The Economist in blaming everything on pig-headed politicians.

 

Bitcoin: an attempt at a new way of creating money

Bitcoin, an attempt to establish a new “peer-to-peer” virtual currency is described in an article in The Economist of June 16, 2011.

One can accept the need to search for new ways of creating money. I believe the recent financial crisis was in part a failure in the way in which our economy currently creates money. (Money is created when bankers make loans, subject to a multiplier effect from the requirement to maintain reserves. When a whole lot of loans went bad this decreased the money supply, again with a multiplier effect. With a suddenly decreased money supply, the economy went for a loop.)

One of the problems with the bitcoin system is the quantity of money available is strictly controlled according to a formula.

I have always liked the quantity theory of money which states that MV=PQ where M is the money supply, V is the velocity at which it changes hands, P is the price or price index and Q is the quantity of goods and services produced.. Therefore as Q goes up (or down) there also need to be changes in at least one of the others. If we want prices to remain constant, then we need a way of creating money such that the supply can easily be varied according to the quantity of goods and service produced.

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