kingaj12

The Coming Economic Collapse, Part 1

This article and discussion is very good -- they can be essentially placed into destabilizing forces described by Minsky. See "Stabilizing an Unstable Economy".

The first force is inequality of incomes. The advanced economies are creating labor force that is paid from corporate profits (think managers, Madison Ave, Wall Street, R&D) and government transfer payments that bid for consumption goods without (at least in the short run) actually contributing to their manufacture.

This induces inflationary pressures on consumption goods in excess of the productivity gains of that sector. Hence the decline in real wages going to that sector, even as the services sector (R&D, advertising, managers) tends to see large wage gains.

Outsourcing production to China/India doesn't change this picture, it just alters the location. Minsky's recommendations were to limit transfer payments along with barriers to entry in labor markets, and to control wage growth in the managerial classes.

The second Minsky force described in this article essentially discusses where we are in the process dealing with yet another inflationary bubble. To combat deflation, we know that we must retain the capability to lend and provide liquidity to the lenders. This is a lesson we have learned real well.

The government paper currently being created is highly liquid and can be used as collateral to finance business loans. Much better collateral IMHO than the RMBS paper that was being used for similar purposes a little while ago. This process will work. There is no reason to doubt this.

The question going forward is how to deal with the inevitable inflationary pressures. All that government paper is just going to be rocket fuel for the next bubble.

Some basic controls on leverage are necessary. Why should we be complacent while banks and hedge funds leverage out 100:1 to create fortunes for themselves? They rely on the services of the Reserve Banks and the Treasury to provide the systemic liquidity that underlies the prospect of delivering such fortunes. When that liquidity is gone, they are essentially asking taxpayers to foot the bill.

Systemic liquidity is a service to speculative investors. If they are so hot, then they should pay for this service. Some kind of liquidity insurance should be demanded of folks who rely on liquidity to unwind huge positions. Currently they get it for free -- from us.