Mann: Yep.

Incidentally I'd argue that if you don't understand this nothing else that comes out of your mouth when it comes to economics should be taken seriously, because it's THAT fundamental to how debt-backed systems work and, for that matter, how a balance sheet works.

i'm going to quote this because it's so important to understand that these concepts are not new and people actually understood how to fix the problem:

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insufficiency of aggregate demand is a symptom of excessive indebtedness and what you have to do to contain a major debt depression event — such as the aftermath of 1873, the aftermath of 1929, the aftermath of 2008 — is you have to prevent it ahead of time. You have to prevent the buildup of debt.

My take on this: Greeks will take money as long as it flows from EFSF & Co, the moment it stops, they'll move to drachma, give the big finger, and six months later will start selling their gas which is waiting around a whole bunch of islands for dollars, euros, or gold... what Germans or other will do when they understand how they were 'pulled over the table' (German expression, sounds much nicer than a good US expression which is rated R), I don't want to predict...

Sure, the Greeks should give the EU the finger and default. But doesn't that mean they pretty much then have to balance their budget immeditately and plan to live on that balanced budget pretty much forever? Not sure about anyone else, but I simply don't see a bunch of "anti-austerity" people making that choice.

What they want is better terms in which they think they can support their own ponzi. So really, this boils down to which ponzi "wins" before it all goes under.

What a mess.

FWIW, as far as which ponzi "wins", I'm guessing it will be the banks.

Mann quoted

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Fisher, on the other hand, is saying something entirely different. He’s saying that the insufficiency of aggregate demand is a symptom of excessive indebtedness and what you have to do to contain a major debt depression event — such as the aftermath of 1873, the aftermath of 1929, the aftermath of 2008 — is you have to prevent it ahead of time. You have to prevent the buildup of debt.

You have to prevent the buildup of debt.

Which is EXACTLY what Karl is advocating and trying to accomplish with his one-dollar-of-capital rule. He's trying to keep debt down to a level where it can be self-liquidating, as the level of debt gets larger and larger the ability to liquidate the debt without large shocks to the economy goes down.

One of the dumbest things our government did was coming up with ways for people to get into houses without 20% down. You could have prevented the whole housing crisis with a two-part rule. All home loans require a 20% down payment and must be fixed-rate for 15 years or less. That would have prevented the whole housing bubble AND, would have given us a stable housing market which would help maintain a stable economy.


Flap

Morla, perhaps I stated it poorly, but I wholly agree that debt default is inevitable. The problem is, as long as there is a can to kick, it will be kicked. The unfortunate aspect of this is not the dilemma of exchanging sovereign debt for private debt and the unholy exchange from the productive members of society (workers) to rentiers, the unfortunate part is that the longer this festers the worse it will be and the more corrupt governments will become. That is, I consider default absolutely necessary if democracy is to survive. Hence, even if Manfm11 is correct and Greece would pay a heavy economic price for a sovereign default, it is better to die on one's feet than live on one's knees.

The correct answer for greece at this moment is to seek a fair and equitable resolution to the unpayable debts.

This is NOT the same as giving the bankers the finger - it they do that then they will be a catastrophe within the country.

They also need to stop the tax avoidance, retirement at 50, non-productive government jobs and all the other CRAP that they are expecting others to fund.

Greece made their own bed - nobody asked them to borrow the money. Time to face the consequences...

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nobody asked them to borrow the money

That's not entirely true.

It's a great web of fraud & deceit. Perhaps if the Greek people had been told the truth 20+ years ago and on-going, they would have acted faster. As it is, you are darn right someone was asking "them" (their representatives) to borrow the money ... the banksters were; and everyone on the inside grew filthy rich from the graft & fraud.

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they do that then they will be a catastrophe within the country

Didn't happen to Iceland.

I don't necessarily completely blame the Greeks for this. I'd wager a guess that more powerful political forces in Europe not only KNEW that Greece's fiscal situation was incompatible with entry into the Euro, but also probably knew full well that Greece's fiscal position was being window dressed by Goldman chicanery to achieve Euro entry.

I can understand the foul taste in German mouths when it appears to them that they are providing transfer payment assistance to Greece during recession... but I didn't hear any German squeaky wheels over the past decade, during the "good times" when southern European weakness helped keep the Euro from over-appreciating while the Germans were running perpetual trade surpluses.

Sure, a Greek abandonment of the Euro would probably be chaotic and painful, but wouldn't a weaker Drachma have some structural advantages that would help the Greek economy?

Things may not happen the way we expect but happen they will.

I think it's well understood. Look at it this way, if you had an asset, lets say a bond that was worth a billion dollars. Would you rather take a haircut or inflate it away, mathematical the outcome is no difference. However, If you haircut the bond maybe you get 20-30 cents on the dollar. If you inflate the bond away, you don't lose your principal and your purchasing power or social status relative to everyone in the economy remains the same as inflation affects everybody.. You also might be able to flip the bond onto some else later on (pension fund). If your rich you prefer inflation, if your poor you want the haircut as your liablities probably exceed you assets.

There's no politician in the world, except Farage, Paul and a few others with enough balls to say the truth... the world is bankrupt and the banks need to go down and the corruption needs to end.

It'll take a collapse before the main party leaders in Washington say the truth and even then I'm pretty much dreaming. They can't say the truth since it would put them in prison since they are complicit.

Hell they probably think that the mess in Europe is good with these kind of headlines...

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10 Year Treasury Prices At Record Low 1.855%

Bullish!

greece says that they are going to tear up their austerity deal-- one day ago.

germany says that they are not going to give any more money without the austerity deal-- one day ago.

this could get interesting.

Oh hell, the Greeks were constructing the foundations of Western Civilization when the Germanic tribes were still wandering the woods, painting their faces blue, and wrestling wolves over pygmy shrew meat. They may not be what they used to be, nevertheless the fact that they can still read biblical Greek, like English speakers can read Middle English, indicates a continuity against which the machinations of a cohort of Kraut banksters will turn out to be about as long-lasting and meaningful as a twenty-euro Copenhagen blow job.

With or without teeth?

Heh. Actually, it's a "slick" new European ergonomic design triumph. Grab for the hair, and they fold back "automatically"...

Deaglecat wrote..

The correct answer for greece the US at this moment is to seek a fair and equitable resolution to the unpayable debts.

This is NOT the same as giving the bankers the finger - it they do that then they will be a catastrophe within the country.

They also need to stop the tax avoidance, retirement at 50, non-productive government jobs and all the other CRAP that they are expecting others to fund.

Greece The US made their own bed - nobody asked them to borrow the money. Time to face the consequences...

FIFY

Deaglecat wrote..

Greece made their own bed - nobody asked them to borrow the money. Time to face the consequences...

Let's say, hypothetically, that on some make-believe planet the Greek political system was completely broken, and for decades. Imagine central planners and economists who constantly reassure the people that asset bubbles are really economic progress, and those who disagree are marginalized as kooks and economic Luddites. Pretend there were politicians so vile, they would place "confidence" above the rule of law, votes and campaign donations above common ethics. If you're able to picture such a crappy world, would you blame the Greek public of "Earth" to the same extent that you blame them here on Utopia?

Thanks for the vid Aztrader! When you link Nigel Farage be sure to mention his name, lest a few of his many fans skim past this gem. Here's a relink:

http://www.youtube.com/watch?v=hJ6_Ey_MJ....

I think Karl's comment on top is meant to agree with my balance sheet assessment, which is why the whole game is ****ed. Everyone is part of the balance sheet, only that some have more to lose than others and to declare debt bad actually means the money on the other side doesn't really exist. It can't be resolved mathematically.

As far as Lacy Hunt goes, I have read Fishers debt deflation writings and I have read the interpretation of many economists in this matter. The key component of Fishers debt deflation is that payment of debt liquidates money and thus makes the remaining debt more difficult to pay. Most economist take this as what is needed is more money to stop the process. Hunt's analysis makes more sense, as to put in more money without destroying the money, the banks or with creditors taking massive direct haircuts, leaves the problem intact. Thus we have a Japanese situation, where debt lies continually on the economy and steady growth never returns. Contrary to opinions of economists like Koo, massive debt, public and private, still hang over the Japanese economy and the efforts of the past 20 plus years have only served to increase the balance sheet of the Japanese Central bank and destroy the balance sheet of the Japanese government, putting the people in constant financial peril. The only way this continues much longer is to put the entire developed worlds population into the vise where the people of Greece currently reside.

I do believe a short term Keynesian solution would have worked if the cart hadn't been put in front of the horse. The wiping out of bank capital and its replacement with haircut bank liabilities together with haircuts on all debt in peril followed by a one time widespread injection of money would have worked much better than the trap we have fallen into. Instead they have left the tortfeasors in charge, the nation buried in debt, the governments finances approaching the point of no return with no solution for budgetary reform with the problem not being solved. We are instead left with the same problem, the economy in weakened form and a wasted 4 years.

I believe there is one solution that might work. That is the government takes the debts, services them, including the bankruptcy and replaces the system with 100% reserve banking. The debts would still be there, but the payments would cycle through the government. The balance sheet would remain intact, government would have its revenue and in fact, managed properly, could retire much of its own debt over time through liquidation of this pool. Performing loans could be sold back to the lending institutions and money pools would bear the risk of lending directly and not on a compound basis of fractional reserve.

Is this a crazy idea? Maybe, but is it any crazier than the ones being employed? There would still be the collateral of debt against the money, but there would be a remedy. The interest on $50 trillion in debt is significant. I don't know that we maintain the status quo of financial assets and avoid economic collapse without some drastic action like this. Absent the direct creation of credit, inflationary implications would only be temporary.

The problems of debt are more of an international problem than a domestic problem. Debt deflation is merely the reversal of the process that gave us too much debt in the first place. A small economy or a broke middle sized economy couldn't even attempt to employ what I think might work, but the USA, with its broad economy, with the international basis of debt in dollars could find a way to make such a system work. The debts wouldn't go away, but would merely be removed from the system and the system of money creation changed. It could be possible the private debt could be used to acquire the public debt. Don't hold me to this nonsense, as it is merely an idea with little development.

Mann, I'd only add that as Karl has said before 100% reserve isn't necessary for secured lending so long as the collateral is marked to market and institutions who are made insolvent given said marking are allowed, or rather required, to fail.

If you are overspending before you default, you will be after.

Austerity cometh. No matter what.

If Greece does leave, at least they are the master of their fate.

bob

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Mann, I'd only add that as Karl has said before 100% reserve isn't necessary for secured lending so long as the collateral is marked to market and institutions who are made insolvent given said marking are allowed, or rather required, to fail.

Isn't '100% reserve' the same as 'one dollar of capital' ?

No.

100% reserve is in fact in many cases (if not most) 200% reserve and is ridiculous. The only time it is not is in the case of unsecured credit.

They made the housing bubble to hide the fact that manufacturing was disappearing