Some have argued that the deflationary nature of pegging the dollar to the value of gold would have prevented the current economic crisis. That is not necessarily true – the real problem was that the central bank and government did not take asset inflation seriously so the sub prime market was allowed to implode and take the banks with it. Also, stricter rules on the lending to capital ratios and more scrutiny to lending is necessary. The US government ignored the warning of Thomas Jefferson:

“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”

By all means argue that gold has a property that makes more sense (something physical that glitters). The fact that the value of that commodity is dependent on things that are not in tandem with the economy, makes it an insane thing to base the currency on.  It does not work in a modern economy. The experience is that it has led to inflexibility to meet economic problems by making monetary policy less effective, and assumes that gold has an inherent value that is more accurate than the value of a currency relative to that of others. A free floating exchange makes more sense. Under the gold standard interest rates are not based on domestic considerations, but on keeping a currency fixed at it’s parity with gold. In short you could cause a recession just doing this – it has a deflationary bias that causes unemployment to be higher then it would be over an economic cycle.

Basing your currency on the value of one commodity (gold, silver, diamonds, bullshit) makes no sense and poses more problems than it supposedly solves (gold miners go on strike, panic raises price of gold, countries with a natural advantage in gold, relative value of other minerals etc) which may be at odds with what monetary policy should be doing at that moment and makes inflation dependent on gold mining in South Africa and Russia. You end up being a hostage to the value of a commodity that does not reflect the fundamentals of the economy, whose world production you do not control.

Most economists reject the gold standard as not sound monetary policy – not just neo-Keynesian. The main proponents are those that use it are libertarians who see public spending as a threat to freedom, and think this is an effective way to do so. Gold has a value as a means of exchange or storage of value. As the basis of sound monetary policy it does not cut it.

http://www.j-bradford-delong.net/Politi … ndard.html

OTHER BLOGS:

The Credit System, Money and the Economy

What is money? Well the answer to that will help to understand the current credit crisis, and how the money markets effect the real economy.

To appreciate that, this video Money as Debt may help to give the background which is really easy to follow.

OTHER BLOGS:

Interest cuts coordinated – but stockmarket does not rebound

If liquidity is a problem in the economy, then a cut in interest rates is a good idea. A coordinated move by six central banks made a cut of 0.5% today – a surprise in the UK where the decision was thought to be made on Thursday when the Bank of England’s monetary policy committee was due to meet. The question though is why did this take so long in coming – this was an obvious first step to take, which could be done quicker than injecting money back into the system. It would have been a signal to the market that central bankers were taking concerns over an economic downturn seriously.

However stock markets are still falling – the FTSE falling by 5% today, the Dax by nearly 6% and Dow Jones at the moment a modest 0.16% gain. Bankers are looking for governments to step in to buy shares, to help market capitalisation – effectively so that they have the funds for the financial system. The domino effect on business and consumers is very real, but the government’s must not write a blank cheque on this. While depositors need to know their funds are secure (to prevent runs on banks), those banking models that put a bank effectively out of business need to be allowed to go under, managed only so that they do not impact on banks which are struggling because of the financial crisis – not due to bad loans. Toxic debt should not be taken completely at face value.

In other major developments:[source BBC News]

• The UK government unveiled a package of measures aimed at rescuing the banking system which could add up to £400bn ($692bn)
• European and US stock markets fell as investors remained unconvinced that the co-ordinated rate cuts and bank rescues would solve the financial crisis.
• All UK savers with accounts in the closed Icelandic internet bank Icesave were told they would get all their money back.
• The Treasury arranged for more than £3bn of UK savers’ money held with Icelandic banks Kaupthing Edge and Heritable Bank to be transferred to ING Direct UK.
• Iceland’s prime minister said he hoped to find a “mutually satisfactory solution” to the loss of UK Icesave deposits after Prime Minister Gordon Brown threatened to sue Iceland to recover the money.

The big interest cuts cuts should have been made sooner. One factor that helps is that it will make the cost of borrowing cheaper. Something which governments with budget deficits need. The only other problem is that with little money going around government borrowing so much will crowd out private sector investment. That however is less of a concern then a banking system that is seized up.

It may seem like socialism to some. Yet there is no need to reward failure or to encourage risky loans. The problem is that the market is usually better at picking winners than governments are. Decisions by central governments have to be done on the basis of what is best for their economy – bringing stability and confidence back into the system. Raising the amount of deposits secured by the state was a positive step.

The question is why it took so long for national governments to act on the levers that they readily had at their disposal. That lack of confidence in handling the credit system crisis is one reason why stock markets are not rallying quickly. The confidence in the world economy is bleak, not helped by a wait and see attitude that for example the UK government has shown on a “case by case” mentality. The government finally announcing measures that make available £400 billion ($692bn) to allow the credit system to flow again as the banks have stopped lending to each other is welcome.

The key points of the plan are:[source BBC News]

• Banks will have to increase their capital by at least £25bn and can borrow from the government to do so.
• An additional £25bn in extra capital will be available in exchange for preference shares.
• £100bn will be available in short-term loans from the Bank of England, on top of an existing loan facility worth £100bn.
• Up to £250bn in loan guarantees will be available at commercial rates to encourage banks to lend to each other.
• To participate in the scheme banks will have to sign up to an FSA agreement on executive pay and dividends.

The failure of macro economic policy lies squarely with elected governments – that enjoyed the good times but did not heed the warning signs till a crisis hit the system. Voters being kicked out of their jobs will have their revenge when election time comes. Much of the pain could have been softened if governments had taken action sooner.

Uncertainty - effecting the economy

DON’T PANIC!

However, when there is more to fear then fear itself and uncertainty that is easy to say. When governments start sending mixed signals the problem of confidence, let alone knowing what is going on with full information, makes rational decision making problematic – adding to the financial crisis.

Ireland guaranteed deposits 100%. This infuriated other member states of the EU, because it put pressure on them to do like wise – exacerbated by capital going to Irish Banks. Yesterday the German Chancellor appeared to state that the government would back savings also by 100%. That is significant – Germany has more savings then any other country. The British Government could not get specifics on the German policy.

If the UK followed suit that would mean guaranteeing funds in excess of a trillion pounds – money which the government does not have. This weekend like last saw bankers loosing time off as a scramble to sure up liquidity and governments buying stakes in banks:

• The German government was forced to salvage a 50bn euro ($69bn; £39bn) rescue package for Hypo Real Estate
• Denmark and Sweden both increased the amount of protection depositors in their banks receive
• Iceland said its banks had agreed to sell some of their overseas assets and was trying to persuade the trade union pension funds to repatriate some of their funds too
• The individual actions came after EU leaders decided at a summit on Saturday not to attempt a pan-European solution
• France’s BNP Paribas said it would take a 75% stake in Fortis. [BBC News]

The worry is domino dancing, with a collapse not just spreading in the banking system in one state but in others as well. In an interdependent world, and single market Europe seems unprepared for quickly speculation is impacting on confidence as they chase after one crisis after another. Rather then providing confidence and stability, this is reacting to events as they unfold.

Before the financial crisis an economic downturn was happening. The situation with banks is going to confound the problem. As well as people and businesses finding it more difficult and costly to get finance there is the added problem. Redundancies are going up and the costs of living are rising. It does matter to us ordinary people on Main Street because what was already a difficult situation is being made worse. There will be less tax payer’s money for public investment – borrowing will be more expensive for the government in these times – and for the type of spending that gets an economy through downturns when the private sector starts delaying investment and scales down production.

As an economist it can be difficult to not sound excited at what is happening. Suddenly everyone is concerned about the economy and what is going on, and what sort of regulation should be in place.When times are good people take it for granted and any muttering of lack of oversight or weaknesses are shouted down as regulation that would strangle the goose that lays the golden egg. The irony as always is such public and government concern and scrutiny of what is going on happens too late when the horse has already bolted.

On that panicked horse are in for a bumpy ride.

Stock markets are once again down suggesting it will take more to calm the beast:

MARKET DATA – 11:36 UK

Could John McCain have pulled ahead, and distanced himself from Bush, by opposing the bill? Polls have Obama leads 50% to 42% having gained during the crisis.

Despite a majority of Republicans being against the bill, it passed by 263 – 171. $100bn in new tax breaks helped move enough Republicans (101 still voted against 91 in favour).

It also included tax breaks to help small businesses and to boost alternative energy, expanded the child tax credit and extended help to victims of recent hurricanes. (BBC News)

Has John McCain lost a beat by not opposing the Bush plan? 45% of people oppose the plan, though a similar number say they are confused by it. The mood however seems to have been blowing in the we need to do something, this is something, therefore we must do it, at least on Capitol Hill with the sweeteners above sealing the deal.

Further financial instability would have started hitting main street, with businesses unable to get credit for the next business transaction or investment to increase production. The question though is that the bill by a way to stabilise the economy without rewarding the mistakes made by the banks.

In Europe however the situation could potentially be worse. In the US 96 cents was lent for every dollar in deposits. In Europe the figures are 1.40 Euros lent for every 1 Euro (The Economist). The only thing we can say is that the worse is not over.

It has only began. This may not even work. In the long run we are all dead. Economists are not the sort of people to always look on the bright side of life. The only thing we can hope for is that this measure calms the markets, makes the bank loosen up and let credit flow again to ease the monetary system.  It is bad enough with businesses lacking custom without their banks not providing finance for decisions, because of their bad loans and lack of funds.

Ultimately animal spirits of the movers and the shakers will decide if this measure succeeds or fails. With people flocking to Ireland with their savings with the government saying that it will guarantee all deposits made that reassurance needs to be global in nature.

It is time for governments of the world to show that globalisation is not just about the allocation of resources, but independent nation states working together on interdependent issues affecting the economy. A free for all could end up in being a free fall.

McCain ain’t Dead

He ain't dead yet. Worse case scenario it happens in the White House. An Obama landslide is premature.

Meanwhile I have been saying that Obama needs to get to 10% by mid October to be safe from McCain making up ground in the closing stages of the campaign. With Gallup having him up by 8% and Rasmussen by 6%. Over the economic meltdown Obama has pulled ahead while McCain has floundered. Would Obama have followed if McCain had attacked the Bush plan? He could have appealed to Democrat leaning voters who are against the bail out. That decision may well come back to haunt McCain, even if he consoles himself that he was doing the right thing for America.

While Obama is on his way to victory, if his camp are really claiming that it will be a landslide that is premature. Victory yes, but in the closing stages McCain will come back  His support is underestimated while Obama’s is overstated – the only poll that counts will wither bear this out or not, the real question is by how much and whether McCain can come back in the final furlong.

With close states going to the current leader, Obama wins 353 to 185 in the electoral college that decides the Presidency (see blog linked below for explanation and how far this has moved from before the economic meltdown). However Obama has narrow leads in 85 of those votes. A 3% swing to McCain in those seats (well within margin of error) makes it 268 to 270 in McCains favour.

If Obama can keep Ohio worth (2.0% lead) worth 20 votes and Florida worth 27 votes (3% lead) then he will win. But calling it a landslide now is almost begging for my analysis to come and bite you in the ass. I want it to be true, but the numbers cannot be taken for granted. Just a 3% swing at the moment would out McCain in and that is so easily possible that if I was a Republican I would be making my base feel that they have to come out and fight while making Democrats feel they can stay at home in key states, it is a done deal.

Democrats need to be talking up the fight rather than being assured and complacent. It is there to be lost and will not take much. There is no prize for winning opinion polls and loosing the only poll that counts – the election. If McCain can get the Democrat controlled congress blamed for the current crisis …

OTHER BLOGS:

Obama 273 McCain 265 – which State will decide it?

From The Atlas of the Real World, out on October 6th. Brought to you by the people that developed Worldmapper giving world history the likes of which you have never seen before.

The ones below the history of wealth starting from 1 AD, displaying the data graphically with the size of territories of (modern) states to scale relative to each other in terms of wealth. It makes the relative changes stand out over the course of time.

Wealth Year 1

Wealth Year 1500

Wealth Year 1900

Wealth Year 1960

Wealth Year 1990

Wealth Year 2015

More on what the maps above represent can be found here.

By 228 votes to 205 votes the House of Representatives rejected Bush’s plan of $700 billion. As a result stock markets went into free fall, with drops not seen since 9/11.

Shares had dropped 60% before the takeover early this morning

Wachovia, fourth biggest bank in the US was bought by Citibank. In Britain Bradford and Bingley now follows Northern Rock being nationalised. On the European continent three governments bailed out Fortis. With a drought in liquidity expect more governments buying shares and taking bad debts out of the financial system. There is more of this to come.

The US Federal Reserve, European Central Bank and eight other central banks promised moves to inject $330 billion to keep the liquidity flowing. Right now the further problem is not just bad loaning decisions and business models. Lack of confidence and expectations that things will get worse is driving animal spirits. However, the game of chicken gets played in US politics.

What will it take to make a deal? Right now two thirds of the Republican Congressmen opposed the bill. No one knows when a bill will return, though both sides of the aisle promise to work together. Obama calls for calm; however the stormy waters continue until a deal is done. The question is who will blink first – the President or Congress.

The problem is that decisions to save a failing business should only happen if the taxpayer is protected in the deal. The cost to the taxpayer in the bail out should be less than the cost of a bank going under would lead to worse for the economy. Protection of savings and deposits are essential for confidence – but shareholders however must accept that on their watch bad decisions were taken. Banks should not be saved on the basis of national pride. We cannot have a situation where profits are kept by private individuals but losses are nationalised.

Meanwhile unemployment rises in the US and UK, and people on main street try to make ends meet while those on Wall Street panic. For many years the credit bubble has been warned about, yet interest rates remained low and banks freely lent beyond reasonable limits of people’s ability to pay. Here we are.

OTHER BLOGS:

Economic woe

The credit crunch, less money floating around and the biggest increase in unemployment in a month since 1992 in the UK, rising to 1.72 million people. Times are tough, and businesses are reassessing how to manage risks and reduce costs. People are also needing to earn money – not least because benefits for the unemployed are less than the poverty line.

Enter the salesman. Direct marketing, face to face in stores, in the street, or door step is a cheap option for a company wanting their product promoted – for one trying to break into a new market, or increase sales. A marketing company gets a contract, and agree a percentage on sales that will be divided between them. The sales person however carries the greater risk. As I discovered having passed a preliminary interview and spending a day with a sales person as a buddy in a well known high street store, selling designer make up.

It is not unusual for sales people to be paid on commission only. There is no minimum wage safeguard here, nor does the 48 hour week apply. The set up is that the sales people used by the marketing company are self employed, contracted by the marketing company. The sales rep is dependent on pitching the product and selling successfully. Watching this in action, from 11 am to 5 pm in a well known high street store, the sales person acting as my buddy to assess me, sold two products, revenue of £60. His percentage meant £18 for 6 hours work; £3.00 per hour compared to the minimum wage of £5.52 ($10.16 where in say Florida the minimum wage is $8). He had spent £3.50 on travel and £1.50 on food.

Indeed the way to keep going is to safeguard a positive mental attitude. Out of 250 people only 8 people listened to the pitch, and 2 bought. In between he raised his spirits by singing lewd lyrics, and telling young women to run up and down the store naked to get the make up (courting them to buy?). My own survival was to imagine I was an undercover journalist trying to pick up sales practise.

This marketing company requires people attending 4 hour a day training sessions (7:30am to 9:30am and 5:30pm to 7:30pm). These are unpaid, and mandatory to be contracted (note that: retained rather than employed) and for future promotion. The significance of promotion is that after 10 months if promoted to Assistant Manager you will be on double commission. In the above example that would have meant a wage rate of £6.00 per hour. The working week is 6 days, and a 12 hour day.

The EU defines the poverty line in the UK at about £10,000 ($18,400) income a year for a single person. Talking to the sales person it is not unusual to be below that threshold in some weeks even working 7 days – “you have to manage your money”. The hook is baited with you having to make a catch, to literally have something to eat. Sale anything and the marketing company take 70%. This is the only way you are trusted to “Always Be Closing” as Alec Baldwins’ character said.

It would take at least 7 to 9 months for you to double your commission. There is no guarantee you will be promoted. The jackpot prize is the promise of going beyond that double commission to running a location where you finally may get an income of about £50,000 a year. I found this however a little difficult to believe – the location manager in question was sharing the house with  my sales buddy with three others. Why do people accept such uncertain income? The promise of becoming the top location guy, who gets a slice of everything down the chain. The same reason why drug dealers accept earning less than someone working at a McDonalds, the promise of becoming a Kingpin. Their odds, if they survive, are better than in any other business environment they may work in to get to the top. At least they dream so.

This boils down to a 6 day week 70 hours with no safety net. Uncapped commission is held out that you keep what you make. The government gets less in the way of taxes by this arrangement, and the marketing companies reduce their tax liability and risk of an unsuccessful product. The money they get from taking the contract on is already theirs. You on the other hand have to rely on people to buy the product. You have to put in the hours. You have to engage as many people as possible (big net for those small fish). You have to close the deal. You then have to make another sale to them (they bought once, so could be a hidden sale).

I could see myself in the role of a salesman – people wanted to listen to the pitch from me, and I found the way to make them want to buy the product if they had the money.  I found myself thinking of different ways of making the close. The buzz as you try to sell. But I could also see in my sales buddy the desperation – it was effecting his body language, and he was not eating well at all. He looked close to a nervous breakdown, as he did imaginary golf swings and sung suspect lyrics about knowing that sort of woman . He was determined to get promotion to manager, he hated sales. Yet he would be doing this for almost a year before realistically having a chance at managing a location. He had Willy Loman’s dream – promising himself a trip to America once he was a location manager. When he had the money.

I heard the early morning mandatory training in the room next door to the waiting room, prior to going on the sale. Loud music up beat music, people being pumped before the sale – when most people would be having a cup of coffee scratching the sand out of their eyes. A discussion of what would happen to whoever sold less that week? Everyone came up with something fun rather than nasty – cook a meal for the boss was the winner. The talk was about installing a positive mental attitude and group solidarity rather than the  Glengarry Glen Ross answer. I recognized this approach – this was holding out a promised land, making it seem obtainable, keeping people in a routine, with a sense of belonging. Reinforced after a day of selling when most people will reject you, almost consider you like an alien wanting to abduct them, with another two hours of reinforced positive thinking. A twelve hour day, a six day week.

It sounded like a cult enterprise. It thrives on the challenge of selling itself though it’s product, and the hard times. But it knows how to motivate you, keep your spirits going. It was telling  when  my buddy told me the pay when I asked him (commission based) which I should not have found out till the first day of work, drawing up a contract. I found that out by courting my sales buddy (a sales technique I know from retail) through empathy.  I could even see how I was falling for a sales pitch at the final interview – a hand outstretched to me after the interview which I shock without thinking and then was told I had the job while being basked with a million dollar smile. How do you back out of that when the guy has made you sell yourself at the interview, with a close like that and my buddy in the room?

That suspicion had come to me at the first interview. I was also given the impression that there were many people being considered, even that the location manager needed to speak to his board of directors after the first interview before confirming the second stage usually  – that usually a decision would not be reached so quickly. I went home rather uneasy, that this was obviously not true.

Why the government does not close the loophole of commission only pay that allows people to be contracted as self-employed people – when in reality they are employees in all but name. No definite income would make loans and a mortgage impossible, and the hours put in equal to one day a week without pay seems to me like low cost serfdom.

The prize is a dream and it reminds me of Death of A Salesman:

“He’s a man way out there in the blue, riding on a smile and a shoeshine. And when they start not smiling back—that’s an earthquake. and then you get yourself a couple of spots on your hat, and you’re finished. Nobody dast blame this man. A salesman is got to dream, boy. It comes with the territory.”

The dark side is a man that has a dream that may not every be his as he sleep walks his time away. Yet people have to survive, whether getting some money or having a delusion that pulls them through. It allows people to have a rotten life, thinking tomorrow will be better while ignoring that what is real is now, and what you do now has repercussions.

The search continues with eyes wide open.

Obama must have been kicking himself for insisting Friday’s debate changed from the economy to foreign policy. Right now the polls are favouring Obama during the financial crisis, and Congress is at logger heads with the Presidents $700 billion rescue plan. One that would allow such future sums of money to be done by the Treasury Secretary without Congress deciding. Something may need doing, but that does not mean the power to scrutinize or hold people to account should not happen. It would also be good to ensure that there is something for the taxpayer rather than nationalising losses and bankers getting pay offs.

The economy is an issue which McCain looses to Obama on. He admitted before he secured the Republican nomination that economics was not his strong point. However, in a show of national leadership and bi partisanship, McCain suspended his campaign to return to Washington.

The worsening economic situation has seen voters increasingly turning to Obama as the candidate best able to lead the country through the crisis. A Washington Post/ABC News poll this morning showed Obama leading 52% to 43% among likely voters. The poll shows voters trust Obama more to handle the economy, 53% to 39%.

Both contenders are working out a joint statement on how they will handle the issue. However, Obama seems intent on going on campaigning while helping out in Washington, and that the debate is still happening Friday.

The action of McCain speaks louder than any policy either candidate has so far voiced on economic policy. At the very least, it is one that is easy to understand for the electorate. It could be an attempt to win votes, but then if politicians do that by taking action to solve a crisis then we may be inclined to say they are worthy of consideration for that.

It does look like it has caught Obama on the back foot, as McCain takes the lead. He looks like the senior Senator and that reminder may well mark out the contrast between him and Obama in the campaign. The official campaign may have stopped. The attempt to influence the voters of course is still business as usual.

It ain’t over till it’s over.