Credit <=> crisis

[ddstory.livejournal.com]

We often hear the assertion that economic crises occur as a result of personal incompetence, greed and bad credits. Never mind the structural inconsistencies in a society. Now, two economists (Michael Kumhof and Romain Ranciere) are proposing a different approach in explaining these phenomena. They've explored an aspect of the US market which is often overlooked, but which is closely related to bankruptcy. And that is the relative level of financial disparity between the various layers of society.

They investigated the economic data around the two biggest financial crises in modern history (1929 and 2008). In both cases they concluded that the crisis happened when the "scissor" between the rich and poor was opened too widely, until at some point it turned out that the top-5% layer was in possession of 34% of the wealth. That was coupled with a simultaneous increase of the share of private credits - in fact it doubled.

They argue that the logic is very simple. In order to sustain the tempo of consumption, people with weaker financial capabilities were compelled to take credits, which eventually they were unable to pay back. Meanwhile, the wealth of the rich (I'm sorry, did someone say "job creators"?) was increased to such an extent that they would invest significant amounts into presumably highly profitable (but also very volatile) credit deals. When the credits stopped being served by a significant number of debtors, the whole system would collapse.

The authors are also proposing some solution to the situation. They argue that workers and employees should be paid such a level of salaries as to allow them a minimum level of living standard without taking credits. Now, the objection is that with increasing their income their needs would automatically increase as well, and this does make sense, but only to some limited extent. The data shows that the usual consumption levels of the wealthy would rise at a slower rate compared to their income, and the remaining extra money they'd rather invest into speculative deals and luxurious items, as opposed to actually fueling the engine of the economy.

Sources:
http://www.smarterearth.org/content/inequality-leverage-and-crises

Comments

Re: Socialist thinking is fundamentally a reversal of cause and effect

[montecristo.livejournal.com]

The erroneous premise behind what you said is the belief that gold has an intrinsic value. You are comparing this supposed objective, intrinsic value, with the dollar value of outstanding debt and finding that there is "not enough gold." The thing you are not considering is that there is not enough gold below a certain price. I agree that, for the government, reestablishing the dollar as a denomination for a certain quantity of redeemable gold would be a herculean task, but it would not be economically impossible. People are exchanging dollars for gold today at a rate of about $1750 per troy ounce. I'm not saying this to imply that this is THE "peg" at which the redeemability of the dollar should be set, rather I am pointing out that there is already an exchange ratio in dollars to gold that has not resulted in the strip mining of the planet. People are still willing to exchange gold for some quantity of dollars and vice versa.