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Old 03-28-2009, 07:48 PM   #1
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United front needed at G20 summit

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By the time world leaders gathered to vent their spleens at the London Economic Conference in June 1933, the Slump had already done its worst. Catastrophic policy errors – tight money – had caused the 1930-31 recession to metastasize into debt deflation. Hitler had been let into government with three cabinet seats, enough to give him the Prussian police and Reich interior ministry. It was all he needed.

Any country that tried to reflate alone was punished by creditors. Most stuck grimly to liquidation. Europe and America undercut each other with beggar-thy-neighbour moves on trade and gold. The surplus countries refused to play their part in restoring demand – just as they refuse today, either because they will not (Germany and the Netherlands, who between them have a surplus of $294 billion) or because they cannot for structural reasons (China, $401 billion).

It was impossible for deficit states to fill the breach, so the system folded on itself. Today, the biggest deficits are:
Today, the biggest deficits are: the US ($673 billion), Spain ($155 billion), Italy ($73 billion), France ($57 billion), Greece ($50 billion), Britain ($46 billion). When the Banque de France withdrew gold deposits from New York in October 1931, the US Federal Reserve was forced to raise rates from 1.5 per cent to 3.5 per cent at a terrible moment. It knocked the stuffing out of the US banking system. Needless to say, France was the bigger loser from this petulant act, though that took time to become evident.
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Germany's finance minister, Peer Steinbruck, is still digging in his heels against "crass Keynesianism". No matter that his economy will shrink 6-7 per cent this year. Germans must sweat it out: some more than others. Unemployment may reach five million in 2010. No doubt spending is a poor instrument, and we are all sick of bail-outs. But Mr Steinbruck might brush up on history. It was the deflation of 1930-1932 – not the hyperinflation of 1923 – that killed Weimar democracy. (Communists and Nazis won half the Reichstag seats in July 1932). The neo-Marxist Linke Party is already angling for 30 per cent in June's Thuringia poll.

You may agree with Mr Steinbruck. Fine. Capitol Hill does not. The most protectionist Congress since Bretton Woods is not going to acquiesce as precious US stimulus leaks abroad to the benefit of "free-riders". Patience will snap. "Buy American" is already US law.

The risk is that this G20 becomes the defining moment when a disgusted American political class – sorely provoked – turns its back on the open trading system. The US alone has the strategic depth to clear its own path, and might find eager partners in a "pro-growth bloc" – much as Britain led a reflation bloc behind Imperial Preference in the early 1930s. As the world's top exporters, Germany and China should take great care to restrain their body language this week.

Well done, Mr Brown, for trying to hold the world together. But if the summit degenerates into a shouting match between mercantilist creditors and prostrate debtors, it may serve only to frighten markets and tip us into the next – more violent – downward leg of this slump.
Only a united front at the London G20 can save the world from ruin - Telegraph
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Old 03-29-2009, 11:19 AM   #2
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Trade is hugely important. We don't want a tit-for-tat situation to arise. I just hope we don't get stagflation with these Keynesian policies again.
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Old 03-30-2009, 11:47 PM   #3
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I have nothing original to add ('Good luck with that', maybe?), but Paul Krugman had an op-ed about this yesterday which was grim in a different way.

America the Tarnished - Paul Krugman - March 29, 2009
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Old 03-31-2009, 10:57 AM   #4
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I just hope that the protesters are more respectful of people's property, than they were a few years back, in Scotland. Burning cars and trashing peoples yards is not the way to get your point across.
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Old 03-31-2009, 01:57 PM   #5
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It's a tiny minority you will, sadly, find at any such demonstration. And yes, they do more bad than they do good, though they, of course, see it totally differently.
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Old 03-31-2009, 07:16 PM   #6
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Originally Posted by yolland View Post
I have nothing original to add ('Good luck with that', maybe?), but Paul Krugman had an op-ed about this yesterday which was grim in a different way.

America the Tarnished - Paul Krugman - March 29, 2009
Love Krugman, he knows what he is talking about. He is a staunch supporter of Keynesian policies. It isn't Keynesian economics that created the mess, it's unfettered capitalism and greed propogated by classicists like Friedman. Hopefully more countries agree to fund a stimulus like Obama, except perhaps more efficient? Obama's stimulus has a bit of filler spending.
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Old 03-31-2009, 09:25 PM   #7
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March 13, 2009

Credit Card Cancer


This week, with his pronouncement that “credit is the lifeblood of a healthy economy,” President Obama reiterated what has been one of his most common themes in diagnosing our economic problem. The president has relied on this bedrock belief to propose policies that place the restoration of credit as the highest priority. However, despite his seemingly earnest intentions, the president and his economic advisors have misdiagnosed the ailment. Savings, not credit, is the lifeblood of a healthy economy. When not used properly credit can be like a cancer that sickens an otherwise healthy economy.

What everyone seems to have forgotten at this point is that credit does not come from thin air. Even in a system in which bank reserves are leveraged many times, someone has to put savings in a bank for the bank to turn around and make a loan. As a result, the bedrock is the savings, which allows for the credit to flow. Credit extended without adequate savings inevitably leads an economy into disaster.

The primary mechanism that has injected credit where it does not belong is the massive credit card industry that has developed in the United States over the last generation. The ease with which these cards may be obtained and the degree to which Americans now rely on them for routine purchases has created a culture of credit that simply has no precedent in a healthy economy. Until this culture has been reformed, America’s fight to restore economic vitality will be a lost cause.

However, this week a much discussed opinion piece in the Wall Street Journal by top banking analyst Meredith Whitney, indicated that many Americans besides the president are still looking toward credit as the means of economic salvation. In her piece, Ms. Whitney writes,

“…Undeniably, consumers look at their unused credit balances as a "what if" reserve. "What if" my kid needs braces? "What if" my dog gets sick? "What if" I lose one of my jobs? This unused credit portion has grown to be relied on as a source of liquidity and a liquidity management tool for many U.S. consumers. If credit is taken away from what otherwise is an able borrower, that borrower's financial position weakens considerably. With two-thirds of the U.S. economy dependent upon consumer spending, we should tread carefully and act collectively.”

In order to keep the economy functioning, Ms. Whitney asks the credit card providers and the federal government to keep credit lines open, so that millions of Americans can keep on spending. However, while such actions would certainly keep our phony economy propped up a while longer, it would further weaken the very foundation upon which a real economy will eventually have to be rebuilt.

Without a doubt, Americans, and all other people for that matter, benefit from having access to “rainy day money.” But Americans should be saving for a rainy day, not adopting the attitude that if it rains I’ll whip out my credit card. If Americans need to pay for a suddenly ill dog, to straighten their kid’s teeth, or to pull them through a period of unemployment, they should save some of their present earnings.

But saving money requires a reduction in spending, and that is something that modern economists, within and without the Administration, cannot abide. A drop in spending will create a sharper contraction in our economy – which is now comprised of 70% consumer spending. But this is no reason to discourage the process. The option to go into debt in the event of an emergency is no substitute for building personal savings for such events. Not only does such a strategy jeopardize the solvency of individuals or families when they are at their most vulnerable, but it deprives society of badly needed savings.

Currently, with so many financially strapped Americans looking to draw on their credit lines, the fallacy of this ‘savings substitute’ is easily revealed. With lenders’ capital depleted, and falling home prices, and rising unemployment putting borrowers at greater risk of default, credit is naturally harder to come by. Had only a small percentage of borrowers needed to access their credit card “rainy day funds” there would have been no credit crisis. But with a deluge drenching so many at once, there was simply not enough credit umbrellas to go around. Had Americans actually been saving money instead, everyone would have his own umbrella and would not now be looking to borrow someone else’s.

Most importantly, as savers bank their earnings into “rainy day funds,” in addition to earning interest, those savings are available to businesses to make capital investments, produce goods and services, and provide employment. Without access to those savings, such investments cannot be made, and society is worse off as a result.

Lastly, savings can always be relied upon whereas credit is ephemeral. Remarks this week from the Chinese premier Wen Jiabao should serve notice to all Americans that the day will soon come when the Chinese stop lending us their umbrellas. When that happens, the average American will be soaked to the bone.
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Old 04-02-2009, 10:52 AM   #8
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Good article Purple! Thanks for posting it. And I agree, too many people were using credit, like there was no tomorrow. I'm in the minority. Other than financing a house and car, I pay cash for everything else. My modest home is now payed for, thank goodness, no more mortgage. My husband and I paid it off early. So, we only have a car payment and normal living expense.

Though, in regards to the amount of people at the G20 protest. Are all of those folks unemployed? On the BBC news, there was thousands of them.
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Old 04-02-2009, 11:51 AM   #9
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I was just watching a news clip from November 16, 2008. The protest in Washington D.C. And I have to say there was quite a difference. The one in London seemed to be quite violent. I understand people's frustration, anger, but I don't like seeing people getting hurt.
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Old 04-02-2009, 05:06 PM   #10
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My modest home is now payed for, thank goodness, no more mortgage.
Good effort! It must be a great relief. Now you're free to save what you need for retirement.
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Old 04-02-2009, 05:50 PM   #11
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Thanks and that's what we will be doing. I don't know how the Social Security System is going to be when, I am 67 years old. I may be working until 80!
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