HMRC warning..

[BeeLZeebub]

the movement of money is wealth creation

It's wonderful to hear that a bank robber is creating wealth, and so is an extortionist, and so is an embezzler.

I for one would not agree with your definition.

And rightly so, because it's not true. Simply moving money is not wealth creation ...

 

[BeeLZeebub]

Riveralt
"In its narrowest definition monetary wealth (M1 to M whatever we are up to now) is simply a value placed on products or services that acts as a lubricant for the economy. Your idea that wealth is somehow a zero sum game fails to reflect these variables".

Money supply measures aggregate money (cash, deposits etc). They dont place any value on anything.

"A persons decision to consume products is determined by two variables MPC (which can be broken down into many sub variables) and MPS (again with many sub variables) who sum to 1".

Hmm. You're describing two elements of a consumer 'multiplier' which determines how the expenditure will impact upon the economy. Consumption itself is determined by prices, incomes, prices of substitutes, changing preferences and so on

"So in this stage of the economic cycle it makes economic sense to tax the poor less and the rich more since the poor will correspondingly spend more of their money on goods and services which move the economy forward".

If you dont go beyond page one of "economics for beginners", yes

"The problem with this approach is another paradox that the rich will not invest because they feel they are getting poorer - thus holding back supply which puts up the price of goods and services".

What theory is this? Is this a tentative reference to the paradox of thrift ... the theory that was discredited about forty years ago?

"So back to your example which demonstrates the velocity of money but with the wrong result. .... In broad terms in this country at this time of the economic cycle £100 will turn into say £580 of products or services consumed".

Again, you're mish-mashing elements of varying theories. A person's propensity to consume has little to do with the velocity of cash in circulation

"The majority are qualitative variables - which is why economic courses are classed as an arts subject rather than a science subject. "

No, not at all. It depends entirely on the university.

 

[BeeLZeebub]

The fact RBS got to the point where it needed such a bailout can't be justified by stating they did it because there was no restriction.
They lost £2 billion pounds and the traders shared a multi million pund bonus kitty (albit reduced from last year). In any other sector, the bonus would have disappeared with the profit, not been reduced. The only reason there is money to share is the bank got such a massive bailout.

I'm not justifying anything, I'm simply highlighting the fact that you're talking about this with the benefit of hindsight. Using your example, it was far from obvious (to anyone) at what point RBS "exposure" had become excessive. What if you lose your job in two year's time? That makes you a bad 'risk' now, so why arent you selling your house?

I wont 'justify' bonus payments either ... what I would say though is that like tips in the services industry, it's become engrained into the pay structure. Generally, they're no longer the 'incentive' they once were.

 

[BeeLZeebub]

will the uneducated ever understand that the movement of money is wealth creation by definition. If you had the best idea in the world that could even change humanity. No banks, no investment, no enterpenuers, no idea comes to fruition, no improvement, when you really look at it, socialist, communist, labourisms, big government etc is anti darwinism, which i am sure as any self respecting scientist/spark would appreciate is completely wrong

The movement of money is not wealth creation. By definition.

 

[BeeLZeebub]

Velocity of money is determined by the Gross Domestic Product divided by the Money Supply. This is one example which explains it in action.

That is just very basic mathematics, with which no numerate person could really disagree. For a given money supply, the faster one moves money around, the greater will (or, at least, can) be GDP.

But we have been talking about wealth, not GDP, and the suggestion that money movement 'creates wealth'. Are saying that, in the mind of an economist, 'wealth' and GDP are the same thing (a suggestion pretty alien and confusing to non-economists)?

Kind Regards, John.

I'd be careful with Riveralt's pick n mix of snippets from basic theories ....

As I said earlier in the thread, "wealth" is subject to debate which is why we confined it to "money and assets", but I'm not sure it's helped.
Wealth can be multi-faceted, and if an economic agent is compelled to act (spend/invest etc) because of what he perceives as wealth, then wealth it is. Interestingly, wealth needent be yours for it to have an 'impact' - stock market gains, for example, can have a broad impact on an economy. Also, a substantial portion of wealth in recent history hasnt been 'real' - it has been a monetary illusion, but people act/spend upon house price gains etc.

So you see, you have to add a time dimension, an individual perception, an agent has to feel compelled to 'act' upon this wealth, so on and so forth.

 

[scousespark]

The fact RBS got to the point where it needed such a bailout can't be justified by stating they did it because there was no restriction.
They lost £2 billion pounds and the traders shared a multi million pund bonus kitty (albit reduced from last year). In any other sector, the bonus would have disappeared with the profit, not been reduced. The only reason there is money to share is the bank got such a massive bailout.

I'm not justifying anything, I'm simply highlighting the fact that you're talking about this with the benefit of hindsight. Using your example, it was far from obvious (to anyone) at what point RBS "exposure" had become excessive. What if you lose your job in two year's time? That makes you a bad 'risk' now, so why arent you selling your house?

I wont 'justify' bonus payments either ... what I would say though is that like tips in the services industry, it's become engrained into the pay structure. Generally, they're no longer the 'incentive' they once were.

I'm not talking with hindsight. I'm an outsider looking in.
In 2007, RBS made a profit and shared this with theire staff. I have absolutely no issue with a provate company doing this.

In 2008, RBS made a massive loss, which would have put a company in any other industry out of business. There was no money to pay bonuses.
The government covered the loss and invested £45 billion pounds of our money. Yippee for the bankers, as bonus time was saved. NOT HINDSIGHT.

The crazy part of the bailout was the lack of conditions.

 

[JohnD]

What theory is this? Is this a tentative reference to the paradox of thrift ... the theory that was discredited about forty years ago?

No it wasn't

It has been criticised, and it has been attacked, and there are opposing opinions. That's not the same thing. Keynsian economics had a hard time under Thatcherism,. and there are still some Thatcherites around, especially in the UK and the US.

http://en.wikipedia.org/wiki/Paradox_of_thrift

 

[BeeLZeebub]

What theory is this? Is this a tentative reference to the paradox of thrift ... the theory that was discredited about forty years ago?

No it wasn't

It has been criticised, and it has been attacked, and there are opposing opinions. That's not the same thing. Keynsian economics had a hard time under Thatcherism,. and there are still some Thatcherites around, especially in the UK and the US.

http://en.wikipedia.org/wiki/Paradox_of_thrift[/QUOTE]

It was discredited, by definition, because academics began to point out its obvious flaws - the predominant one being that it ignores the role of investment in a society, which is a hard argument to circumvent. I'll concede that some neo-Keynesians try, but then the likes of Paul Krugman continues to argue that the total level of debt in society is irrelevant, despite decades of empirical evidence (and one mother of a debt crisis) to the contrary.

 

[ban-all-sheds]

http://www.mindworkshop.com/deficit.html

 

[BeeLZeebub]

I'm not talking with hindsight. I'm an outsider looking in.

In 2007, RBS made a profit and shared this with theire staff. I have absolutely no issue with a provate company doing this.

In 2008, RBS made a massive loss, which would have put a company in any other industry out of business. There was no money to pay bonuses.
The government covered the loss and invested £45 billion pounds of our money. Yippee for the bankers, as bonus time was saved. NOT HINDSIGHT.

The crazy part of the bailout was the lack of conditions.

OK - fair enough. The point I'm making is that banks (though perhaps not RBS!!) have been too easily criticised. The nature of their role means that they will always be party to a boom and bust, but does this make it their fault? It may feel like it when we have to bail one or two out for fear of the (worse) repurcussions if we did not; but the truth is that the roots of the post-2008 crisis are long and intertwined and have a profound political element, make no mistake about that.

 

[ban-all-sheds]

The nature of their role means that they will always be party to a boom and bust, but does this make it their fault?

Long answer:

Nobody forced them to throw caution to the winds and lend to people and countries who were clearly poor risks.

Nobody forced them to invent financial instruments based on unsound loans and sell them to other organisations.

Nobody forced them to buy things from other organisations which they did not understand.


Short answer:

Yes.

 

[JohnD]

It was discredited, by definition, because academics began to point out its obvious flaws

Acedemics love to criticise each other.

It might be discredited in your mind. For all I know you might be a monetarist.

 

[BeeLZeebub]

The nature of their role means that they will always be party to a boom and bust, but does this make it their fault?

Long answer:

Nobody forced them to throw caution to the winds and lend to people and countries who were clearly poor risks.

Nobody forced them to invent financial instruments based on unsound loans and sell them to other organisations.

Nobody forced them to buy things from other organisations which they did not understand.

Short answer:

Yes.

Wrong either way. What you describe was symptomatic of the boom, not the cause. Moreover ...

Banks lend, that's what they do, so being 'forced' doesnt come into it. Then identifying what is and is not a good credit risk has its limits. Clearly, "Throwing caution to the wind" and "clearly poor risks" are nonsense, a priori, concepts. Your point would be to suggest that insurers should never be caught out by earthquakes, for example. Are you a good credit risk now? Can you guarantee your future income stream? No, neither can they, which is why risk assessment in any industry is art not science, and besides, the fact is that people like booms. Those responsible for a boom and bust belong as much on the demand side of the equation as the supply side.

As for inventing financial instruments based on "unsound loans" (again, implausibly retrospective), this was down to a few select banks, not the industry ... and as I've said previously, if firms are forced into unhealthy competition, the outcome is seldom sustainable or attractive.

 

[JohnD]

if firms are forced into unhealthy competition, the outcome is seldom sustainable or attractive.

that's a strange way to look at it.

Companies determined to increase the appearance of profits think of some weird and wonderful ways to do it

And you say they were "forced" into it??????????

As for inventing financial instruments based on "unsound loans" (again, implausibly retrospective), this was down to a few select banks, not the industry

So you're suggesting that structured products and CDOs only relate to "a few select banks?" In that case the financial crisis must have been just a minor thing. No, that's not right....

implausibly retrospective

The idea that making loans to people who can't pay them back, on poor security, tempting them in at low interest rates which are then going to rocket, can only be seen as A Bad Thing after it's crashed?

 

[BeeLZeebub]

if firms are forced into unhealthy competition, the outcome is seldom sustainable or attractive.

that's a strange way to look at it.

Companies determined to increase the appearance of profits think of some weird and wonderful ways to do it

And you say they were "forced" into it??????????

Not really. I'm suggesting that certain banks / entities that packaged asset-backed securities probably felt that it was an area that they couldnt afford to simply hand to the competition. You have to remember that interest rates are 'a' bank's meal-ticket and they spent an awful lot of time at historically low levels - a market distortion ....